-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NyYGI8NfvTMXxSfWnU6PNLGcPxvAXu3zTayPs5OVhx8W26R21k0YDMaodNxS6wqH wt3Y2Ic+Wiwabq7zosvJwA== 0000901309-02-000113.txt : 20020415 0000901309-02-000113.hdr.sgml : 20020415 ACCESSION NUMBER: 0000901309-02-000113 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINANCIAL INSTITUTIONS INC CENTRAL INDEX KEY: 0000862831 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 160816610 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26481 FILM NUMBER: 02572003 BUSINESS ADDRESS: STREET 1: 220 LIBERTY STREET CITY: WARSAW STATE: NY ZIP: 14569 BUSINESS PHONE: 7167861100 MAIL ADDRESS: STREET 1: 220 LIBERTY STREET CITY: WARSAW STATE: NY ZIP: 14569 10-K 1 form10kdec01.txt ANNUAL REPORT ON FORM 10-K 12/31/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITIONS REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 ----------------- Commission File Number 0-26481 FINANCIAL INSTITUTIONS, INC. (Exact Name of Registrant as specified in its charter) NEW YORK 16-0816610 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification Number) 220 Liberty Street Warsaw, NY 14569 ----------------------------- ----- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number Including Area Code: (585) 786-1100 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Title of Class: COMMON STOCK, PAR VALUE $.01 PER SHARE 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 twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days. YES[X] NO[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] As of March 1, 2002 there were issued and outstanding, exclusive of treasury shares, 11,009,761 shares of the Registrant's Common Stock. The aggregate market value of the 7,760,764 shares of voting stock held by non-affiliates of the Registrant was $219,397,000, as computed by reference to the last sales price on March 1, 2002, as reported by the Nasdaq National Market. Solely for purposes of this calculation, all persons who are directors and executive officers of the Registrant and all persons who are believed by the Registrant to be beneficial owners of more than 5% of its outstanding stock have been deemed to be affiliates. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement filed with the Securities and Exchange Commission in connection with the 2002 Annual Meeting of Shareholders is incorporated by reference in Part III of this Annual Report on Form 10-K. FINANCIAL INSTITUTIONS, INC. 2001 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I Item 1. Business of the Company 3 Item 2. Properties 18 Item 3. Legal Proceedings 19 Item 4. Submission of Matters for a Vote by Security Holders 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 19 Item 6. Selected Financial Data Management Discussion 20 Item 7. and Analysis of Financial Condition and Results of Operations 21 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 36 Item 8. Financial Statements and Supplementary Data 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 68 PART III Item 10. Directors and Executive Officers of the Registrant 68 Item 11. Executive Compensation 68 Item 12. Security Ownership of Certain Beneficial Owners and Management 68 Item 13. Certain Relationships and Related Transactions 68 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 69 2 PART I ITEM I. BUSINESS OF THE COMPANY GENERAL Financial Institutions, Inc. (the "Company" or "FII") is a financial holding company headquartered in Warsaw, New York, which is located 45 miles southwest of Rochester and 45 miles southeast of Buffalo. The Company operates a super-community bank holding company - a bank holding company that owns multiple community banks that are separately managed. The Company owns five commercial banks that provide consumer, commercial and agricultural banking services in Western and Central New York State: Wyoming County Bank ("WCB"), The National Bank of Geneva ("NBG"), The Pavilion State Bank ("PSB"), First Tier Bank & Trust ("FTB") and Bath National Bank ("BNB"), collectively referred to as the "Banks". The Company was formed in 1931 to facilitate the management of three of these banks that had been primarily owned by the Humphrey family during the late 1800s and early 1900s. In recent years, the Company has grown through a combination of internal growth, the opening of new branch offices and acquisitions. The Company became qualified in May 2000 as a financial holding company (see Gramm-Leach-Bliley Act discussion beginning on page 14), and has since incorporated two financial services subsidiaries into its operations: Burke Group, Inc. ("BGI") and The FI Group, Inc. ("FIGI"), collectively referred to as the "Financial Services Group". BGI is an employee benefits and compensation consulting firm acquired by the Company in October 2001. FIGI is a brokerage subsidiary that commenced operations as a start-up company in March 2000. In February 2001, the Company formed FISI Statutory Trust I ("FISI"), to accommodate the private placement of $16.2 million in capital securities, the proceeds of which were utilized to partially fund the acquisition of Bath National Corporation ("BNC"). The capital securities are identified on the balance sheet as guaranteed preferred beneficial interests in corporation's junior subordinated debentures. As a super-community bank holding company, the Company's strategy has been to manage its bank subsidiaries on a decentralized basis. This strategy provides the Banks the flexibility to efficiently serve their markets and respond to local customer needs. While generally operating on a decentralized basis, the Company has consolidated selected lines of business, operations and support functions in order to achieve economies of scale, greater efficiency and operational consistency. By increasing the use of existing technology and by further centralizing back-office operations, management believes substantial additional growth can be accomplished without incurring proportionately greater operational costs. The relative sizes and profitability of the Company's operating subsidiaries as of and for the year ended December 31, 2001, are depicted in the following table:
Percent Percent Subsidiary Assets of Total Net Income of Total ------------------------------------------------------------------------------------------------ (Dollars in thousands) Wyoming County Bank $ 551,346 31% $ 8,424 40% The National Bank of Geneva 546,539 30 8,322 39 Bath National Bank 362,645 20 1,142 * 5 The Pavilion State Bank 177,000 10 2,674 13 First Tier Bank & Trust 161,763 9 1,827 9 Parent, non-bank subsidiaries and eliminations, net (4,997) - (1,176) (6) ------------ ------ ---------- -------- Total $ 1,794,296 100 $ 21,213 100 ========= ====== ====== ======= * From date of acquisition (May 1, 2001)
MERGERS AND ACQUISITIONS On May 1, 2001, FII acquired all of the common stock of Bath National Corporation ("BNC"), and its wholly-owned subsidiary bank, Bath National Bank. BNB is a full service community bank headquartered in Bath, New York, which has 9 branch locations in Steuben, Yates, Ontario and Schuyler Counties. The 3 Company paid $48.00 per share in cash for each of the outstanding shares of BNC common stock with an aggregate purchase price of approximately $62.6 million. The acquisition was accounted for under the purchase method of accounting, and accordingly, the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, has been recorded as goodwill. Goodwill recognized with respect to the merger was approximately $37.2 million. Goodwill was amortized in 2001 using the straight-line method over 15 years, since the transaction was consummated prior to June 30, 2001, the effective date of SFAS No. 142. However, in accordance with SFAS No. 142, the Company ceased goodwill amortization on January 1, 2002 and will evaluate goodwill for impairment annually. The results of operations for BNB are included in the income statement from the date of acquisition (May 1, 2001) to the end of the period. On October 22, 2001, the Company acquired the Burke Group, Inc. ("BGI"), an employee benefits administration and compensation consulting firm, with offices in Honeoye Falls and Syracuse, New York. BGI's expertise includes design and consulting for retirement and employee welfare plans, administrative services for defined contribution and benefit plans, actuarial services and post employment benefits. Under the terms of the agreement, BGI shareholders received primarily common stock as consideration for their ownership in BGI. The acquisition was accounted for under the purchase method of accounting, and accordingly, the excess of the purchase price over the fair value of identifiable assets acquired, less liabilities assumed, has been recorded as goodwill, after recognizing an intangible asset separate from goodwill in accordance with SFAS No. 141. Goodwill recognized with respect to the merger was approximately $1.3 million. In accordance with SFAS No. 142, the Company is not required to amortize goodwill on this acquisition, but evaluates goodwill for impairment on an annual basis. The Company also recorded a $500,000 intangible asset which is being amortized using the straight-line method over five years. The results of operations for BGI are included in the income statement from the date of acquisition (October 22, 2001) to the end of the period. In July 2001, the FASB issued SFAS Nos. 141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method, use of the pooling-of-interests method is no longer permitted for business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill (including goodwill reported in prior acquisitions) no longer be amortized to earnings, but instead be reviewed for impairment annually, with impairment losses charged to earnings when they occur. The Company is required to adopt SFAS No. 142 effective January 1, 2002. The results of operations for year ended December 31, 2001 include goodwill amortization from the BNB acquisition of $1,653,000. The amortization of goodwill ceased effective January 1, 2002. On January 11, 2002, FII reached a definitive agreement to acquire all of the outstanding stock of the Bank of Avoca ("BOA"). BOA is a retail oriented institution with its main office located in Avoca, New York, as well as, a branch located in Cohocton, New York. Total assets of BOA approximated $17.9 million as of December 31, 2001. FII will fund the transaction using $1.5 million in FII stock, based on the average sales price of FII stock for the 30 trading days immediately prior to the closing date. The acquisition which is subject to approval by BOA shareholders and by various regulatory agencies, will be accounted for using the purchase method of accounting and is currently scheduled to be completed in the second quarter of 2002. Subsequently, BOA will merge with and into BNB. FORWARD LOOKING STATEMENTS This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words "anticipate", "believe", "estimate", "expect", "intend", "may", and similar expressions identify such forward-looking statements. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. These forward-looking statements are based on the current expectations of the Company or the Company's management and are subject to a number of risks and uncertainties, including but not limited to, economic, competitive, regulatory, and other factors affecting the Company's operations, markets, products and services, as well as expansion 4 strategies and other factors discussed elsewhere in this report filed by the Company with the Securities and Exchange Commission. Many of these factors are beyond the Company's control. MARKET AREA AND COMPETITION The Company operates 41 branches and has 55 ATMs in twelve contiguous counties of Western and Central New York State: Allegany, Cattaraugus, Erie, Genesee, Livingston, Monroe, Ontario, Schuyler, Seneca, Steuben, Wyoming and Yates Counties. The Company's market area is geographically and economically diversified in that it serves both rural markets and, increasingly, the larger more affluent markets of suburban Rochester and suburban Buffalo. Rochester and Buffalo are the two largest cities in New York State outside of New York City, with combined metropolitan area populations of over two million people. The Company anticipates increasing its presence in the markets around these two cities. The Company faces significant competition in both making loans and attracting deposits, as Western and Central New York have a high density of financial institutions. The Company's competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies and other financial service companies. Its most direct competition for deposits has historically come from savings and loan associations, savings banks, commercial banks and credit unions. The Company faces additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. LENDING ACTIVITIES General. The Company, through its banking subsidiaries, offers a broad range of loans including commercial and agricultural working capital and revolving lines of credit, commercial and agricultural mortgages, equipment loans, crop and livestock loans, residential mortgage loans and home equity lines of credit, home improvement loans, student loans, automobile loans, personal loans and credit cards. The Company sells most of its newly originated fixed rate residential mortgage loans in the secondary market. Under the Company's decentralized management philosophy, each of the banks determines individually which loans are sold and which are retained for the portfolio. The Company retains the servicing rights on most mortgage loans it sells and realizes monthly service fee income. Underwriting Standards. The Company's loan policy establishes the general parameters of the types of loans that are desirable, emphasizing cash flow and collateral coverage. Under the decentralized management structure, credit decisions are made at the subsidiary bank level by officers who generally have had long personal experience with most of their commercial and many of their individual borrowers, helping to ensure thorough underwriting and sound credit decisions. Each subsidiary bank approves its own loan policy that must comply with the Company's overall loan policy. These policies establish the lending authority of individual loan officers as well as the loan authority of the banks' loan committees. The subsidiary bank CEO and Senior Loan Administrator each have loan authority up to $250,000 while other lending authorities are $100,000 or less. The CEO and Senior Loan Administrator can approve up to $500,000 jointly. Each bank subsidiary has a loan committee, which includes outside members of the subsidiary bank's Board of Directors, with the authority to approve loans up to the subsidiaries legal lending limit. To assure the maximum salability of the residential loan products for possible resale into the secondary mortgage markets, the Company has formally adopted the underwriting, appraisal, and servicing guidelines of the Federal Home Loan Mortgage Corporation ("Freddie Mac") as part of its standard loan policy and procedures manual. Commercial Loans. The Company, through its banking subsidiaries, originates commercial loans in its primary market areas and underwrites them based on the borrower's ability to service the loan from operating income. The Company, through its banking subsidiaries, offers a broad range of commercial lending products, including term loans and lines of credit. Short- and medium-term commercial loans, primarily collateralized, are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition of real estate, expansion and improvements) and the purchase of equipment. As a general practice, a collateral lien is placed on any available real estate, 5 equipment or other assets owned by the borrower and a personal guarantee of the borrower is obtained. At December 31, 2001, $45.8 million, or 19.7%, of the aggregate commercial loan portfolio was at fixed rates while $186.6 million, or 80.3%, was at variable rates. The Company also utilizes government loan guarantee programs offered by the Small Business Administration (or "SBA") and Rural Economic and Community Development (or "RECD") when appropriate. See "Government Guarantee Programs" below. Commercial Real Estate Loans. In addition to commercial loans secured by real estate, the Company, through its banking subsidiaries, makes commercial real estate loans to finance the purchase of real property which generally consists of real estate with completed structures. Commercial real estate loans are secured by first liens on the real estate, typically have variable interest rates and are amortized over a 10 to 20 year period. The underwriting analysis includes credit verification, appraisals and a review of the borrower's financial condition. At December 31, 2001, $48.0 million, or 17.5%, of the aggregate commercial real estate loan portfolio was at fixed rates while $226.7 million, or 82.5%, was at variable rates. Agricultural Loans. Agricultural loans are offered for short-term crop production, farm equipment and livestock financing and agricultural real estate financing, including term loans and lines of credit. Short- and medium-term agricultural loans, primarily collateralized, are made available for working capital (crops and livestock), business expansion (including acquisition of real estate, expansion and improvement) and the purchase of equipment. The Banks also closely monitor commodity prices and inventory build-up in various commodity categories to better anticipate price changes in key agricultural products that could adversely affect the borrowers' ability to repay their loans. At December 31, 2001, $18.8 million, or 10.1%, of the agricultural loan portfolio was at fixed rates while $167.8 million, or 89.9%, was at variable rates. The Banks utilize government loan guarantee programs offered by the SBA and the Farm Service Agency (or "FSA") of the United States Department of Agriculture where available and appropriate. See "Government Guarantee Programs" below. Residential Real Estate Loans. The Banks originate fixed and variable rate one-to-four family residential real estate loans collateralized by owner-occupied properties located in its market areas. A variety of real estate loan products which generally are amortized over five to 30 years are offered. Loans collateralized by one-to-four family residential real estate generally have been originated in amounts of no more than 80% of appraised value or have mortgage insurance. Mortgage title insurance and hazard insurance is normally required. The Company sells most newly originated fixed rate one-to-four family residential mortgages to Freddie Mac and retains the rights to service the mortgages. At December 31, 2001, the servicing portfolio totaled $246.0 million in residential mortgages, all of which have been sold to Freddie Mac. At December 31, 2001, $163.9 million, or 68.3%, of residential real estate loans retained in portfolio was at fixed rates while $76.2 million, or 31.7%, was at variable rates. Consumer and Home Equity Loans. The Banks originate direct and indirect credit automobile loans, recreational vehicle loans, boat loans, home improvement loans, fixed and open-ended home equity loans, personal loans (collateralized and uncollateralized), student loans and deposit account collateralized loans. Visa cards that provide consumer credit lines are also issued. The terms of these loans typically range from 12 to 120 months and vary based upon the nature of the collateral and the size of loan. The majority of the consumer lending program is underwritten on a secured basis using the customer's home or the financed automobile, mobile home, boat or recreational vehicle as collateral. At December 31, 2001, $175.2 million, or 75.5%, of aggregate consumer and home equity loans was at fixed rates while $57.0 million, or 24.5%, was at variable rates. Government Guarantee Programs. The Banks participate in government loan guarantee programs offered by the SBA, RECD and FSA. At December 31, 2001, the Banks had loans with an aggregate principal balance of $39.4 million that were covered by guarantees under these programs. The guarantees only cover a certain percentage of these loans. By participating in these programs, the Banks are able to broaden their base of borrowers while minimizing credit risk. Delinquencies and Nonperforming Assets. The Banks have several procedures in place to assist in maintaining the overall quality of the Company's loan portfolio. Specific underwriting guidelines have 6 been established to be followed by the lending officers. The Company monitors each bank subsidiary's delinquency levels on a monthly basis for any adverse trends. Classification of Assets. Through the loan review process, the Banks maintain internally classified loan lists which, along with delinquency reporting, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans classified as "substandard" are those loans with clear and defined weaknesses such as a higher leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition, which may jeopardize recoverability of the debt. Loans classified as "doubtful" are those loans which have characteristics similar to substandard accounts but with an increased risk that a loss may occur, or at least a portion of the loan may require a charge-off if liquidated at present. Loans classified as "loss" are those loans which are in the process of being charged-off. A loan is generally placed on nonaccrual status and ceases accruing interest when the payment of principal or interest is delinquent for 90 days, or earlier in some cases, unless the loan is in the process of collection and the underlying collateral further supports the carrying value of the loan. Allowance for Loan Losses. The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance reflects management's estimate of the amount of reasonably foreseeable losses, based on the following factors: o the amount of historical charge-off experience; o the evaluation of the loan portfolio by the loan review function; o levels and trends in delinquencies and non-accruals; o trends in volume and terms; o effects of changes in lending policy; o experience, ability and depth of management; o national and local economic trends and conditions; and o concentration of credit. Charge-offs occur when loans are deemed to be uncollectible. Management presents a quarterly review of the allowance for loan losses to each subsidiary bank's Board of Directors as well as to the Company's Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. In order to determine the adequacy of the allowance for loan losses, the risk classification and delinquency status of loans and other factors are considered, such as collateral value, government guarantees, portfolio composition, trends in economic conditions and the financial strength of borrowers. Specific allowances for loans which have been individually evaluated for impairment are established when required. An allowance is also established for groups of loans with similar risk characteristics, based upon average historical charge-off experience taking into account levels and trends in delinquencies, loan volumes, economic and industry trends and concentrations of credit. INVESTMENT ACTIVITIES General. The Company's investment securities policy is contained within the overall Asset-Liability Management and Investment Policy. This policy dictates that investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, need for collateral and desired risk parameters. In pursuing these objectives, the Company considers the ability of 7 an investment to provide earnings consistent with factors of quality, maturity, marketability and risk diversification. The Board of each subsidiary bank adopts an asset/liability policy containing an investment securities policy within the parameters of the Company's overall asset/liability policy. The FII Treasurer, guided by the separate ALCO Committees of each subsidiary bank, is responsible for securities portfolio decisions within the established policies. The Company's investment securities strategy centers on providing liquidity to meet loan demand and redeeming liabilities, meeting pledging requirements, managing overall interest rate risk and maximizing portfolio yield. Subsidiary bank policies generally limit security purchases to the following: o U.S. treasury securities; o U.S. government agency and government sponsored agency securities; o mortgage-backed pass-through securities and collateralized mortgage obligations ("CMOs") issued by the Federal National Mortgage Association ("FNMA"), the Government National Mortgage Association ("GNMA") and Freddie Mac ("FHLMC"); o investment grade municipal securities, including tax, revenue and bond anticipation notes and general obligation and revenue notes and bonds; o certain creditworthy un-rated securities issued by municipalities; and o investment grade corporate debt. The Company currently does not participate in hedging programs, interest rate swaps, or other activities involving the use of off-balance sheet derivative financial instruments. Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," requires recognition of 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. The Company adopted SFAS No. 133 on January 1, 2001. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. Additionally, the Company's investment policy limits investments in corporate bonds to no more than 10% of total investments and to bonds rated at the time of purchase as Baa or better by Moody's Investor Services, Inc. or BBB or better by Standard & Poor's Ratings Services. SOURCES OF FUNDS General. Deposits and borrowed funds, primarily Federal Home Loan Bank ("FHLB") advances and sweep repurchase agreements, are the primary sources of the Company's funds for use in lending, investing and for other general purposes. In addition, repayments on loans, proceeds from sales of loans and securities, and cash flows from operations provide additional sources of funds. Deposits. The Company, through its banking subsidiaries, offers a variety of deposit account products with a range of interest rates and terms. The deposit accounts consist of savings, interest-bearing checking accounts, checking accounts, money market accounts, savings, club accounts and certificates of deposit. The Company offers certificates of deposit with balances in excess of $100,000 at preferential rates (jumbo certificates) to local municipalities, businesses, and individuals as well as Individual Retirement Accounts ("IRAs") and other qualified plan accounts. To enhance its deposit product offerings, the Company provides commercial checking accounts for small to moderately-sized commercial businesses, as well as a low-cost checking account service for low-income customers. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Banks' deposits are obtained predominantly from the areas in which the Banks' branch offices are located. The Banks rely primarily on competitive pricing of 8 their deposit products, customer service and long-standing relationships with customers to attract and retain these deposits. Borrowed Funds. Borrowings consist primarily of advances entered into with the FHLB and repurchase agreements. The Company anticipates the continued use of borrowings as a source of funding loan growth. Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures. The Company formed a trust in February 2001 to accommodate the private placement of $16.2 million in capital securities, the proceeds of which were utilized to partially fund the acquisition of BNC. SUPERVISION AND REGULATION The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, the deposit insurance funds regulated by the FDIC and the banking system as a whole, and not for the protection of shareholders or creditors of bank holding companies. The various bank regulatory agencies have broad enforcement power over bank holding companies and banks, including the power to impose substantial fines, operational restrictions and other penalties for violations of laws and regulations. The following description summarizes some of the laws to which the Company and its subsidiaries are subject. References to applicable statutes and regulations are brief summaries and do not claim to be complete. They are qualified in their entirety by reference to such statutes and regulations. Management believes the Company is in compliance in all material respects with these laws and regulations. Changes in the laws, regulations or policies that impact the Company cannot necessarily be predicted, but they may have a material effect on the business and earnings of the Company. THE COMPANY The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to supervision, regulation and examination by the Federal Reserve Board. The Bank Holding Company Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. Regulatory Restrictions on Dividends; Source of Strength. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the holding company's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its banking subsidiaries and commit resources to their support. Such support may be required at times when, absent this Federal Reserve Board policy, a holding company may not be inclined to provide it. As discussed below, a bank holding company in certain circumstances could be required to guarantee the capital plan of an undercapitalized banking subsidiary. Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Board's Regulation Y, for example, generally requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company's consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. 9 Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice. The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1,000,000 for each day the activity continues. Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by a holding company or its affiliates. Capital Adequacy Requirements. The Federal Reserve Board has adopted a system using risk-based capital guidelines to evaluate the capital adequacy of bank holding companies. Under the guidelines, specific categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. The guidelines require a minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. As of December 31, 2001, the Company's ratio of Tier 1 capital to total risk-weighted assets was 9.81% and the ratio of total capital to total risk-weighted assets was 11.37%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition-Capital Resources." In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company's Tier 1 capital divided by three-month average consolidated assets. Certain highly-rated bank holding companies may maintain a minimum leverage ratio of 3.0%, but other bank holding companies may be required to maintain a leverage ratio of up to 200 basis points above the regulatory minimum. As of December 31, 2001, the Company's leverage ratio was 7.02%. The federal banking agencies' risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to take "prompt corrective action" to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes "undercapitalized," it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary's compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution's holding company is entitled to a priority of payment in bankruptcy. The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution's assets at the time it became undercapitalized or the amount necessary to cause the institution to be "adequately capitalized." The bank regulators have greater power in situations where an institution becomes "significantly" or "critically" undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates. 10 Acquisitions by Bank Holding Companies. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors. Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% of more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, would, under the circumstances set forth in the presumption, constitute acquisition of control of the Company. In addition, any entity is required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the Company's outstanding common stock, or otherwise obtaining control or a "controlling influence" over the Company. THE BANKS Wyoming County Bank ("WCB"), Pavilion State Bank ("PSB") and First Tier Bank & Trust ("FTB") are New York State-chartered banks. National Bank of Geneva ("NBG") and Bath National Bank ("BNB") are national banks chartered by the Office of the Comptroller of Currency. All of the deposits of the five subsidiary banks are insured by the FDIC through the Bank Insurance Fund. FTB is a member of the Federal Reserve System. The Banks are subject to supervision and regulation that subject them to special restrictions, requirements, potential enforcement actions and periodic examination by the FDIC, the Federal Reserve Board and the New York State Banking Department (in the case of the state-chartered banks) and the Office of the Comptroller of Currency (in the case of the national banks). Because the Federal Reserve Board regulates the bank holding company parent of the Banks, the Federal Reserve Board also has supervisory authority which directly affects the banks. Restrictions on Transactions with Affiliates and Insiders. Transactions between the holding company and its subsidiaries, including the Banks, are subject to Section 23A of the Federal Reserve Act. In general, Section 23A imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of the Company or its subsidiaries. Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain transactions between the holding company and its affiliates be on terms substantially the same, or at least as favorable to the banks, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons. The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as "insiders") contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution's total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends paid by the Banks have provided a substantial part of the Company's operating funds and, for the foreseeable future, it is 11 anticipated that dividends paid by the Banks will continue to be its principal source of operating funds. Capital adequacy requirements serve to limit the amount of dividends that may be paid by the subsidiaries. Under federal law, the subsidiaries cannot pay a dividend if, after paying the dividend, a particular subsidiary will be "undercapitalized." The FDIC may declare a dividend payment to be unsafe and unsound even though the bank would continue to meet its capital requirements after the dividend. Because the Company is a legal entity separate and distinct from its subsidiaries, the Company's right to participate in the distribution of assets of any subsidiary upon the subsidiary's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors. In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any depository bank holding company (such as the Company) or any shareholder or creditor thereof. Examinations. The New York State Banking Department (in the case of WCB, PSB and FTB), the Office of the Comptroller of the Currency (in the case of NBG and BNB), the Federal Reserve Board and the FDIC periodically examine and evaluate the Banks. Based upon such examinations, the appropriate regulator may revalue the assets of the institution and require that it establish specific reserves to compensate for the difference between what the regulator determines the value to be and the book value of such assets. Audit Reports. Insured institutions with total assets of $500 million or more at the beginning of a fiscal year must submit annual audit reports prepared by independent auditors to federal and state regulators. In some instances, the audit report of the institution's holding company can be used to satisfy this requirement. Auditors must receive examination reports, supervisory agreements and reports of enforcement actions. In addition, financial statements prepared in accordance with generally accepted accounting principles, management's certifications concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by the FDIC, and an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted. The FDIC Improvement Act of 1991 requires that independent audit committees be formed, consisting of outside directors only. The committees of institutions with assets of more than $3 million must include members with experience in banking or financial management, must have access to outside counsel and must not include representatives of large customers. Capital Adequacy Requirements. The FDIC has adopted regulations establishing minimum requirements for the capital adequacy of insured institutions. The FDIC may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. The FDIC's risk-based capital guidelines generally require state banks to have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and a ratio of total capital to total risk-weighted assets of 8.0%. The capital categories have the same definitions for the Company. As of December 31, 2001, the ratio of Tier 1 capital to total risk-weighted assets for the Banks was 8.95% for WCB, 9.24% for NBG, 14.18% for BNB, 9.14% for PSB and 8.94% for FTB, and the ratio of total capital to total risk-weighted assets was 10.21% for WCB, 10.50% for NBG, 15.43% for BNB, 10.40% for PSB and 10.20% for FTB. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The FDIC's leverage guidelines require state banks to maintain Tier 1 capital of no less than 4.0% of average total assets, except in the case of certain highly rated banks for which the requirement is 3.0% of average total assets. As of December 31, 2001, the ratio of Tier 1 capital to average total assets (leverage ratio) was 6.56% for WCB, 6.96% for NBG, 8.43% for BNB, 7.02% for PSB and 6.08% for FTB. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 12 Corrective Measures for Capital Deficiencies. The federal banking regulators are required to take "prompt corrective action" with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are "well-capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A "well-capitalized" bank has a total risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An "adequately capitalized" bank has a total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in its most recent examination report and is not experiencing significant growth); and does not meet the criteria for a well-capitalized bank. A bank is "undercapitalized" if it fails to meet any one of the ratios required to be adequately capitalized. In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment. As an institution's capital decreases, the FDIC's enforcement powers become more severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The FDIC has only very limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator. Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital. Deposit Insurance Assessments. The bank subsidiaries must pay assessments to the FDIC for federal deposit insurance protection. The FDIC has adopted a risk-based assessment system as required by the FDIC Improvement Act. Under this system, FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications (that is, institutions that pose a greater risk of loss to their respective deposit insurance funds) pay assessments at higher rates than institutions that pose a lower risk. An institution's risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances. The FDIC maintains a process for raising or lowering all rates for insured institutions semi-annually if conditions warrant a change. Under this system, the FDIC has the flexibility to adjust the assessment rate schedule twice a year without seeking prior public comment, but only within a range of five cents per $100 above or below the premium schedule adopted. Changes in the rate schedule outside the five cent range above or below the current schedule can be made by the FDIC only after a full rulemaking with opportunity for public comment. The Deposit Insurance Fund Act of 1996 contained a comprehensive approach to recapitalizing the Savings Association Insurance Fund and to assuring the payment of the Financing Corporation's bond obligations. Under this law, banks insured under the Bank Insurance Fund are required to pay a portion of the interest due on bonds that were issued by the Financing Corporation in 1987 to help shore up the ailing Federal Savings and Loan Insurance Corporation. Enforcement Powers. The FDIC and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject the Company or its banking subsidiaries, as well 13 as the officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. Brokered Deposit Restrictions. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll over brokered deposits. Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which generally makes commonly controlled insured depository institutions liable to the FDIC for any losses incurred in connection with the failure of a commonly controlled depository institution. Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA") and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank's record in meeting the needs of its service area when considering applications regarding establishing branches, mergers or other bank or branch acquisitions. FIRREA requires federal banking agencies to make public a rating of a bank's performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, the subsidiary banks are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include, among others, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Banks must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations. CHANGING REGULATORY STRUCTURE GRAMM LEACH-BLILEY ACT The Gramm-Leach-Bliley Act ("Gramm-Leach") was signed into law on November 12, 1999. Gramm-Leach permits, subject to certain conditions, combinations among banks, securities firms and insurance companies beginning March 11, 2000. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service including banking, securities underwriting, insurance (both underwriting and agency), and merchant banking. In order to engage in these additional financial activities, a bank holding company must qualify and register with the Board of Governors of the Federal Reserve System as a "financial holding company" by demonstrating that each of its bank subsidiaries is "well capitalized," "well managed," and has at least a "satisfactory" rating under the CRA. On May 12, 2000 the Company received approval from the Federal Reserve Bank of New York to become a financial holding company. Gramm-Leach establishes that the federal banking agencies will regulate the banking activities of financial holding companies and banks' financial subsidiaries, the U.S. Securities and Exchange Commission will regulate their securities activities and state insurance regulators will regulate their insurance activities. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers' nonpublic, personal information. The major provisions of Gramm-Leach are: 14 Financial Holding Companies and Financial Activities. Title I establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company system to engage in a full range of financial activities through qualification as a new entity known as a financial holding company. A bank holding company that qualifies as a financial holding company can expand into a wide variety of services that are financial in nature, provided that its subsidiary depository institutions are well-managed, well-capitalized and have received at least a "satisfactory" rating on their last CRA examination. Services that have been deemed to be financial in nature include securities underwriting, dealing and market making, sponsoring mutual funds and investment companies, insurance underwriting and agency activities and merchant banking. Title I also required the FDIC to adopt regulations implementing Section 121 of Title I, regarding permissible activities and investments of insured state banks. Final regulations adopted by the FDIC in January 2001, in the form of amendments to Part 362 of the FDIC rules and regulations, provide the framework for subsidiaries of state nonmember banks to engage in financial activities that Gramm-Leach permits national banks to conduct through a financial subsidiary. The regulations require that prior to commencing such financial activities, a state nonmember bank must notify the FDIC of its intent to do so, and must certify that it is well-managed and that it and all of its subsidiary insured depository institutions are well-capitalized after deducting its investment in the new subsidiary. Furthermore, the regulations require that the notifying bank must, and must continue to, (i) disclose the capital deduction in published financial statements, and (ii) comply with sections 23A and 23B of the Federal Reserve Act and (iii) comply with all required financial and operational safeguards. Activities permissible for financial subsidiaries of national banks, and, pursuant to Section 362 of the FDIC rules and regulations, also permissible for financial subsidiaries of state nonmember banks, include, but are not limited to, the following: (a) Lending, exchanging, transferring, investing for others, or safeguarding money or securities; (b) Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any State; (c) Providing financial, investment, or economic advisory services, including advising an investment company; (d) Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and (e) Underwriting, dealing in, or making a market in securities. Securities Activities. Title II narrows the exemptions from the securities laws previously enjoyed by banks, requires the Federal Reserve Board and the SEC to work together to draft rules governing certain securities activities of banks and creates a new, voluntary investment bank holding company. Insurance Activities. Title III restates the proposition that the states are the functional regulators for all insurance activities, including the insurance activities of federally-chartered banks, and bars the states from prohibiting insurance activities by depository institutions. The law encourages the states to develop uniform or reciprocal rules for the licensing of insurance agents. Privacy. Under Title V, federal banking regulators were required to adopt rules that have limited the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. Federal banking regulators issued final rules on May 10, 2000 to implement the privacy provisions of Title V. Under the rules, financial institutions must provide: - initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; - annual notices of their privacy policies to current customers; and - a reasonable method for customers to "opt out" of disclosures to nonaffiliated third parties. 15 Compliance with the rules is mandatory after July 1, 2001. The Company and the banks were in full compliance with the rules as of or prior to their respective effective dates. Safeguarding Confidential Customer Information. Under Title V, federal banking regulators are required to adopt rules requiring financial institutions to implement a program to protect confidential customer information. In January 2000, the federal banking agencies adopted guidelines requiring financial institutions to establish an information security program to: - identify and assess the risks that may threaten customer information; - develop a written plan containing policies and procedures to manage and control these risks; - implement and test the plan; and - adjust the plan on a continuing basis to account for changes in technology, the sensitivity of customer information and internal or external threats to information security. The Banks approved security programs appropriate to their size and complexity and the nature and scope of their operations prior to the July 1, 2001 effective date of the regulatory guidelines, and are implementating the programs on an ongoing basis. Community Reinvestment Act Sunshine Requirements. In February 2001, the federal banking agencies adopted final regulations implementing Section 711 of Title VII, the CRA Sunshine Requirements. The regulations require nongovernmental entities or persons and insured depository institutions and affiliates that are parties to written agreements made in connection with the fulfillment of the institution's CRA obligations to make available to the public and the federal banking agencies a copy of each agreement. The regulations impose annual reporting requirements concerning the disbursement, receipt and use of funds or other resources under these agreements. The effective date of the regulations was April 1, 2001. Neither the Company nor the banks is a party to any agreement that would be the subject of reporting pursuant to the CRA Sunshine Requirements. The Company continues to evaluate the strategic opportunities presented by the broad powers granted to bank holding companies that elect to be treated as financial holding companies. In the event that the Company determines that access to the broader powers of a financial holding company is in the best interests of the Company, its shareholders and the banks, the Company will file the appropriate election with the Federal Reserve Board. The Company and the Banks intend to comply with all provisions of Gramm-Leach and all implementing regulations as they become effective. USA PATRIOT ACT As part of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA Patriot Act"), signed into law on October 26, 2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 ("IMLAFATA"). IMLAFATA authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks, bank holding companies, or other financial institutions. These measures may include enhanced recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions. Covered financial institutions also are barred from dealing with foreign "shell" banks. In addition, IMLAFATA expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours. 16 Treasury regulations implementing the due diligence requirements must be issued no later than April 24, 2002. Whether or not regulations are adopted, the law becomes effective July 23, 2002. Additional regulations are to be adopted during 2002 to implement minimum standards to verify customer identity, to encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, to prohibit the anonymous use of "concentration accounts," and to require all covered financial institutions to have in place a Bank Secrecy Act compliance program. IMLAFATA also amends the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing an application under these acts. The Banks have in place a Bank Secrecy Act compliance program, and it engages in very few transactions of any kind with foreign financial institutions or foreign persons. EXPANDING ENFORCEMENT AUTHORITY The Federal Reserve Board, the Office of the Comptroller of Currency, the New York State Superintendent of Banks and the FDIC possess extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. For example, the FDIC may terminate the deposit insurance of any institution which it determines has engaged in an unsafe or unsound practice. The agencies can also assess civil money penalties, issue cease and desist or removal orders, seek injunctions, and publicly disclose such actions. EFFECT ON ECONOMIC ENVIRONMENT The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits. Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. 17 ITEM 2. PROPERTIES The Company conducts business through its corporate office, full service bank offices and branches. The Company's headquarters and operations center is located in Warsaw, New York. This facility is leased for a nominal rent from the Wyoming County Industrial Development Agency for local tax reasons and the Company has the right to purchase it for nominal consideration beginning in November, 2006. The following table lists the properties of each of the subsidiary banks:
TYPE OF LEASED OR EXPIRATION LOCATION FACILITY OWNED OF LEASE -------- -------- ----- -------- WYOMING COUNTY BANK Warsaw............................. Main Office Own -- Mount Morris....................... Branch Own -- Lakeville.......................... Branch Own -- Attica............................. Branch Own -- North Java......................... Branch Own -- Wyoming............................ Branch Own -- North Warsaw....................... Branch Own -- Strykersville...................... Branch Own -- Yorkshire.......................... Branch Lease April 2002 Geneseo............................ Branch Own -- Dansville.......................... Branch Lease December 2006 Honeoye Falls...................... Branch Lease April 2008 Williamsville...................... Branch Lease May 2003 THE NATIONAL BANK OF GENEVA Geneva............................. Main Office Own -- Geneva............................. Drive-up Branch Own -- Geneva (Plaza)..................... Branch Ground Lease December 2006 Canandaigua........................ Branch Own -- Waterloo........................... Branch Own -- Penn Yan........................... Branch Own -- Ovid............................... Branch Own -- BATH NATIONAL BANK Bath............................... Main Office Own -- Bath............................... Drive-up Branch Own -- Hammondsport....................... Branch Own -- Wayland............................ Branch Own -- Dundee............................. Branch Own -- Hornell............................ Branch Own -- Watkins Glen....................... Branch Lease October 2002 Naples............................. Branch Own -- Erwin.............................. Branch Lease August 2004 THE PAVILION STATE BANK Pavilion........................... Main Office Own -- Caledonia.......................... Branch Lease April 2006 LeRoy.............................. Branch Own -- Batavia............................ Branch Lease October 2011 Batavia (In-Store)................. Branch Lease August 2008 North Chili........................ Branch Lease July 2015 FIRST TIER BANK & TRUST Salamanca.......................... Main Office Own -- Ellicottville...................... Branch Own -- Allegany........................... Branch Own -- Olean.............................. Branch Own -- Olean.............................. Drive-up Branch Own -- Cuba............................... Branch Lease November 2007
18 ITEM 3. LEGAL PROCEEDINGS From time to time the Company and its subsidiaries are parties to or otherwise involved in legal proceedings arising in the normal course of business. Management does not believe that there is any pending or threatened proceeding against the Company or its subsidiaries which, if determined adversely, would have a material effect on the Company's business, results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the year ended December 31, 2001 to a vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The common stock of the Company is traded under the symbol of FISI on the Nasdaq National Market. At March 1, 2002, the Company had 11,009,761 shares of common stock outstanding (exclusive of treasury shares) and had approximately 1,900 shareholders of record. The high and low prices listed below represent actual sales transactions as reported by Nasdaq. Sales Price Cash Dividends High Low Close Declared ----------------------------------------------------- 2001 First Quarter $ 20.000 $ 13.000 $ 19.625 $ 0.11 Second Quarter 24.250 18.000 22.400 0.12 Third Quarter 26.650 21.000 23.440 0.12 Fourth Quarter 24.850 17.100 23.400 0.13 2000 First Quarter 13.250 10.375 11.750 0.10 Second Quarter 15.000 11.938 14.000 0.10 Third Quarter 15.438 12.375 14.875 0.11 Fourth Quarter 15.375 13.375 13.609 0.11 19 ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands) December 31 ------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------- SELECTED FINANCIAL CONDITION DATA Total assets $1,794,296 $1,289,327 $1,136,460 $976,185 $880,512 Loans, net 1,146,976 873,262 752,324 645,857 594,332 Securities available for sale 428,423 257,823 197,134 154,171 107,492 Securities held to maturity 61,281 76,947 81,356 91,016 99,084 Deposits 1,433,658 1,078,111 949,531 850,455 767,726 Borrowed funds 190,389 62,384 56,336 13,862 12,066 Shareholders' equity 149,187 131,618 117,539 96,578 86,843 (Dollars in thousands) For the years ended December 31 ------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------- SELECTED OPERATIONS DATA Interest income $114,468 $96,467 $78,692 $72,660 $66,972 Interest expense 49,694 43,605 31,883 30,958 27,851 --------------- ---------------- --------------- -------------- --------------- Net interest income 64,774 52,862 46,809 41,702 39,121 Provision for loan losses 4,958 4,211 3,062 2,732 2,829 --------------- ---------------- --------------- -------------- --------------- Net interest income after provision for loan loss 59,816 48,651 43,747 38,970 36,292 Noninterest income 15,782 9,409 8,055 6,591 5,929 Noninterest expense 43,352 30,156 27,032 24,602 22,084 --------------- ---------------- --------------- -------------- --------------- Income before income taxes 32,246 27,904 24,770 20,959 20,137 Income taxes 11,033 9,804 8,813 7,354 7,295 --------------- ---------------- --------------- -------------- --------------- Net income $21,213 $18,100 $15,957 $13,605 $12,842 =============== ================ =============== ============== ===============
At or for the years ended December 31 -----------------------------------------------------------
2001 2000 1999 1998 1997 ----------------------------------------------------------- PER COMMON SHARE DATA Net income - diluted $1.77 $1.51 $1.38 $1.22 $1.14 Cash dividends declared 0.48 0.42 0.31 0.26 0.22 Book value 11.93 10.36 9.05 7.94 6.94 Market value 23.40 13.61 12.12 - - At or for the years ended December 31 ----------------------------------------------------------- 2001 2000 1999 1998 1997 ----------------------------------------------------------- SELECTED FINANCIAL RATIOS AND OTHER DATA Performance Ratios: Return on common equity 15.84% 15.78% 16.16% 16.28% 17.62% Return on assets 1.34 1.51 1.54 1.48 1.54 Common dividend payout 26.77 27.81 22.54 21.43 19.28 Net interest rate spread 3.96 3.98 4.19 4.24 4.43 Net interest margin (2) 4.62 4.87 5.00 5.06 5.21 Efficiency ratio 48.49 45.19 45.55 46.64 45.22 Noninterest income to average total assets (3) 0.96 0.76 0.75 0.69 0.69 Noninterest expenses to average total assets 2.73 2.52 2.61 2.68 2.65 Average interest-earning assets to average interest bearing liabilities 119.67 123.25 124.86 123.05 121.91 Asset Quality Ratios: Non-performing loans to total loans 0.86% 0.80% 0.75% 0.93% 1.24% Non-performing assets to total loans and other real 0.94 0.91 0.88 1.24 1.62 estate Allowance for loan losses to non-performing loans 190.32 195.06 198.83 156.86 108.95 Allowance for loan losses to total loans 1.64 1.56 1.50 1.46 1.35 Net charge-offs during the period to average loans outstanding during the year 0.23 0.21 0.17 0.21 0.32 Capital ratios: Equity to total assets 8.31% 10.21% 10.34% 9.89% 9.86% Average common equity to average assets 7.84 8.78 8.63 8.09 7.70 Other Data: Number of full-service offices 41 32 29 28 27 Loans serviced for others (in millions) $302.3 $205.2 $200.2 $177.8 $153.2 Full time equivalent employees 608 441 411 384 383 (1) Averages presented are daily averages. (2) Net interest income divided by average interest earning assets. A tax-equivalent adjustment to interest earned from tax-exempt securities has been computed using a federal tax rate of 35%. (3) Noninterest income excludes net gain (loss) on sale of securities available for sale.
20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income in 2001 was $21.2 million, or 17% more than the $18.1 million earned in 2000. In 1999, net income was $16.0 million. Diluted earnings per share for the year ended December 31, 2001 was $1.77, compared to $1.51 in 2000 and $1.38 in 1999. The return on average common equity in 2001 was 15.84%, compared to 15.78% in 2000 and 16.16% in 1999. The return on average assets in 2001 was 1.34%, compared to 1.51% in 2000 and 1.54% in 1999. On May 1, 2001, FII acquired all of the common stock of Bath National Corporation ("BNC"), and its wholly-owned subsidiary bank, Bath National Bank. BNB is a full service community bank headquartered in Bath, New York, which has 9 branch locations in Steuben, Yates, Ontario and Schuyler Counties. The Company paid $48.00 per share in cash for each of the outstanding shares of BNC common stock with an aggregate purchase price of approximately $62.6 million. The acquisition was accounted for under the purchase method of accounting. The results of operations for BNB are included in the income statement from the date of acquisition (May 1, 2001) to the end of the period. On October 22, 2001, the Company acquired the Burke Group, Inc. ("BGI"), an employee benefits administration and compensation consulting firm, with offices in Honeoye Falls and Syracuse, New York. BGI's expertise includes design and consulting for retirement and employee welfare plans, administrative services for defined contribution and benefit plans, actuarial services and post employment benefits. Under the terms of the agreement, BGI shareholders received primarily common stock as consideration for their ownership in BGI. The acquisition was accounted for under the purchase method of accounting. The results of operations for BGI are included in the income statement from the date of acquisition (October 22, 2001) to the end of the period. The strong performance in 2001 can be attributed to a combination of continued focus on basic banking principles, expansion of product lines and geographic presence and the realization of immediate benefits from recent acquisitions. Each of the subsidiary banks performed very well during the year, including BNB. Acquired in the second quarter of 2001, BNB was efficiently integrated and immediately contributed to consolidated results. The Company continued to penetrate its existing market areas in addition to expanding further in the suburban Buffalo and Rochester markets. Effective interest margin management, despite a declining rate environment and a lagging economy, and solid balance sheet growth were the primary drivers of our results. FII also experienced continued growth of fee-based services. The Company anticipates further expansion of the financial services businesses in the coming years as a result of the fourth quarter acquisition of BGI, the largest independent retirement plan consulting company in Western and Central New York. The BGI acquisition enables FII to further diversify its revenue stream and better leverage the trust and brokerage businesses for future growth. 21 LENDING ACTIVITIES Set forth below is selected information concerning the composition of the Company's loan portfolio.
At December 31 ------------------------------------------------------------------------- (Dollars in thousands) 2001 2000 1999 1998 1997 ------------------------------------------------------------------------- Commercial $ 232,379 $ 169,832 $ 140,376 $ 117,750 $ 105,811 Commercial real estate 274,702 166,041 137,648 106,897 99,218 Agricultural 186,623 165,367 151,534 123,754 107,546 Residential real estate 240,141 201,160 189,149 181,828 170,396 Consumer and home equity 232,205 184,745 145,038 125,198 119,506 -------- -------- -------- -------- ------- Total loans, gross 1,166,050 887,145 763,745 655,427 602,477 Allowance for loan losses (19,074) (13,883) (11,421) (9,570) (8,145) ------------ ---------- ---------- ---------- -------- Total loans, net $ 1,146,976 $ 873,262 $ 752,324 $ 645,857 $ 594,332 ============ ========== ========== ========== ==========
Total loans increased to $1.2 billion at December 31, 2001 from $887.1 million at December 31, 2000, an increase of $279.0 million or 31.4%. The acquisition of BNB accounted for $189.5 million of the loan growth with the balance of $89.5 million generated principally from continued expansion of the commercial loan portfolio. Commercial loans increased $62.6 million ($40.5 million from the BNB acquisition) or 36.8%, while commercial real estate loans increased by $108.7 million ($56.9 million from the BNB acquisition) or 65.4%. At December 31, 2001, commercial loans totaled $232.4 million, representing 19.9% of total loans, and commercial real estate loans totaled $274.7 million, representing 23.60% of total loans. The significant increase in commercial loans and commercial real estate loans reflect the Banks' business development efforts. At December 31, 2001, agricultural loans, which include agricultural real estate loans, represented 16.0% of the total loan portfolio. During 2001, agricultural loans increased by $21.2 million ($7.2 million from the BNB acquisition), or 12.9%, to $186.6 million. As of December 31, 2001, residential real estate loans grew by $39.0 million ($50.5 million from the BNB acquisition) or 19.4% from December 31, 2000, and totaled $240.1 million or 20.6% of total loans. Considering BNB residential real estate loans acquired amounted to $50.5 million, the residential real estate portfolio decreased $11.5 million in 2001. This decrease is a reflection of the Company's trend towards selling residential real estate mortgages, which is evidenced by the increase in the sold and serviced residential real estate loan portfolio during 2001. During 2001 and 2000, the Company sold loans totaling $117,446,000 and $25,880,000, respectively. The Company also offers a broad range of consumer loan products. Consumer and home equity loans grew by $47.5 million ($34.4 million from the BNB acquisition) or 25.7%, in 2001 and ended the year at $232.2 million, representing 19.9% of the total loan portfolio. Total loans increased to $887.1 million at December 31, 2000 from $763.7 million at December 31, 1999, an increase of $123.4 million or 16.2%. Commercial loans increased $29.4 million or 20.9%, while commercial real estate loans increased by $28.4 million or 20.6%. At December 31, 2000, commercial loans totaled $169.8 million, representing 19.1% of total loans, and commercial real estate loans totaled $166.0 million, representing 18.7% of total loans. At December 31, 2000, agricultural loans, which include agricultural real estate loans, represented 18.7% of the total loan portfolio. During 2000, agricultural loans increased by $13.9 million, or 9.2%, to $165.4 million. As of December 31, 2000, residential real estate loans had grown by $12.1 million or 6.4% from December 31, 1999, and totaled $201.2 million or 22.7% of the total loan portfolio. The growth in the portfolio resulted from the Banks' business development efforts and broad line of variable and fixed-rate mortgage products. Consumer and home equity loans grew by $39.7 million, or 27.4%, in 2000 and ended the year at $184.7 million, representing 20.8% of the total loan portfolio. The majority of the increase in consumer loans was from an expanded indirect lending program. 22 NONACCRUING LOANS AND NONPERFORMING ASSETS Nonperforming assets increased $3.0 million to $11.0 million at December 31, 2001 compared to the prior year. The increase in nonperforming assets relates directly to nonperforming assets acquired with BNB. However, given the continuing growth of the loan portfolio, the Company's ratio of nonperforming loans to total loans of 0.86% at December 31, 2001, increased slightly from the ratio of 0.80% at December 31, 2000. The overall level of nonperforming assets as a percentage of total loans and other real estate was 0.94% at December 31, 2001, comparable to 0.91% at December 31, 2000. The following table sets forth information regarding nonaccruing loans and other nonperforming assets.
At December 31 ------------------------------------------------------------- (Dollars in thousands) 2001 2000 1999 1998 1997 ------------------------------------------------------------- Nonaccruing loans (1) Commercial $ 2,623 $ 1,044 $ 1,159 $ 1,250 $ 970 Commercial real estate 3,344 1,619 1,373 995 1,648 Agricultural 1,529 2,881 1,455 2,340 2,669 Residential real estate 921 835 413 733 1,325 Consumer and home equity 541 217 375 423 431 -------- --------- --------- --------- --------- Total nonaccruing loans 8,958 6,596 4,775 5,741 7,043 Accruing loans 90 days or more delinquent 1,064 521 969 360 433 -------- --------- --------- --------- --------- Total nonperforming loans 10,022 7,117 5,744 6,101 7,476 Other real estate owned 947 932 969 2,084 2,309 -------- --------- --------- --------- --------- Total nonperforming assets $ 10,969 $ 8,049 $ 6,713 $ 8,185 $ 9,785 ======= ======== ======== ======== ======== Total nonperforming loans to total loans 0.86% 0.80% 0.75% 0.93% 1.24% Total nonperforming assets to total loans and other real estate 0.94% 0.91% 0.88% 1.24% 1.62% (1) Loans are placed on nonaccrual status when they become 90 days or more past due or if they have been identified by the Company as presenting uncertainty with respect to the collectibility of interest or principal.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents the estimated amount of credit losses inherent in the Banks' loan portfolios. The Company performs periodic, systematic reviews of its Banks' portfolios to identify these inherent losses, and to assess the overall probability of collection of these portfolios. These reviews result in the identification and quantification of loss factors, which are used in determining the amount of the allowance for loan losses. In addition, the Company periodically evaluates prevailing economic and business conditions, industry concentrations, changes in the size and characteristics of the portfolio and other pertinent factors. The allowance for loan losses is allocated to cover the estimated losses inherent in each loan category based on the results of this detailed review. The process used by the Company to determine the appropriate overall allowance for loan losses is based on this analysis, taking into consideration management's judgment. Allowance methodology is reviewed on a periodic basis and modified as appropriate. Based on this analysis, the Company believes that the allowance for loan losses is fairly stated at December 31, 2001. At December 31, 2001, the Company's allowance for loan losses totaled $19.1 million, an increase of $5.2 million over the previous year end. The allowance as a percentage of total loans was 1.64% at December 31, 2001, compared to 1.56% in 2000. The allowance as a percentage of total nonperforming loans was 190.32% at December 31, 2001, compared to 195.06% at December 31, 2000. 23 The following table sets forth an analysis of the activity in the allowance for loan losses for the periods indicated.
Years Ended December 31 ------------------------------------------------------------- (Dollars in thousands) 2001 2000 1999 1998 1997 ------------------------------------------------------------- Balance at beginning of year $ 13,883 $ 11,421 $ 9,570 $ 8,145 $ 7,129 Addition as a result of BNB acquisition 2,686 - - - - Charge-offs: Commercial 1,003 466 312 263 500 Commercial real estate 394 629 139 687 746 Agricultural 58 85 12 19 - Residential real estate 178 113 461 215 131 Consumer and home equity 1,319 905 663 488 620 ------- -------- -------- -------- -------- Total charge-offs 2,952 2,198 1,587 1,672 1,997 Recoveries: Commercial 58 206 88 106 12 Commercial real estate 23 22 23 84 18 Agricultural - 1 - - 1 Residential real estate 19 5 163 42 26 Consumer and home equity 399 215 102 133 127 ------- -------- -------- ---------- -------- Total recoveries 499 449 376 365 184 Net charge-offs 2,453 1,749 1,211 1,307 1,813 Provision for loan losses 4,958 4,211 3,062 2,732 2,829 ------- -------- -------- ---------- -------- Balance at end of year $ 19,074 $ 13,883 $ 11,421 $ 9,570 $ 8,145 ========= ========== ========== ========= ========= Ratio of net charge-offs during the year to average loans outstanding during the year 0.23% 0.21% 0.17% 0.21% 0.32% Ratio of allowance for loan losses to total loans 1.64% 1.56% 1.50% 1.46% 1.35% Ratio of allowance for loan losses to nonperforming loans 190.32% 195.06% 198.83% 156.86% 108.95%
The following table summarizes the loan delinquencies (excluding nonaccrual) in the loan portfolio as of December 31, 2001:
60-89 90 Days (Dollars in thousands) Days or More ---- ------- Commercial $ 446 $ 275 Commercial real estate 674 160 Agricultural - - Residential real estate 677 357 Consumer and home equity 891 272 -------- ------- Total $ 2,688 $ 1,064 ======== =======
24 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES The following table sets forth the allocation of the allowance for loan losses by loan category at the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which actual losses may occur. The total allowance is available to absorb losses from any segment of the loan portfolio.
At December 31 ----------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent of of Loans of of Loans of of Loans of of Loans of of Loans Allowance in Each Allowance in Each Allowance in Each Allowance in Each Allowance in Each for Category for Category for Category for Category for Category Loan to Total Loan to Total Loan to Total Loan to Total Loan to Total (Dollars in thousands) Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans --------------------------------------------------------------------------------------------------------- Commercial $ 5,358 19.9% $ 3,402 19.1% $ 2,314 18.4% $ 3,227 17.9% $ 2,406 17.6% Commercial real estate 3,877 23.6 2,094 18.7 2,181 18.0 1,734 16.3 1,237 16.5 Agricultural 2,586 16.0 2,464 18.7 1,591 19.8 1,288 18.9 1,377 17.8 Residential real estate 1,957 20.6 1,259 22.7 952 24.8 1,489 27.8 1,328 28.3 Consumer and home equity 3,413 19.9 2,449 20.8 1,792 19.0 1,643 19.1 1,490 19.8 Unallocated 1,883 - 2,215 - 2,591 - 189 - 307 - -------- --- ------- --- ------ --- -------- ---- -------- --- Total $ 19,074 100% $ 13,883 100% $ 11,421 100% $ 9,570 100% $ 8,145 100% ======== === ======= === ======= === ======== === ======== ===
LOAN MATURITY AND REPRICING SCHEDULE The following table sets forth certain information as of December 31, 2001, regarding the amount of loans maturing or repricing in the portfolio. Demand loans having no stated schedule of repayment and no stated maturity and overdrafts are reported as due in one year or less. Adjustable and floating-rate loans are included in the period in which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed-rate loans are included in the period in which the final contractual repayment is due.
At December 31, 2001 --------------------------------------------------------------- One Within Through After One Five Five (Dollars in thousands) Year Years Years Total ------------- ----------- ----------- ------------ Commercial $ 98,986 $ 89,678 $ 43,715 $ 232,379 Commercial real estate 9,134 36,115 229,453 274,702 Agricultural 42,296 50,964 93,363 186,623 Residential real estate 10,168 22,024 207,949 240,141 Consumer and home equity 14,241 138,407 79,557 232,205 ------------- ----------- ----------- ------------ Total loans $ 174,825 $ 337,188 $ 654,037 $ 1,166,050 ============= =========== =========== ============ Loans maturing after one year: With a predetermined interest rate $ 216,874 $ 200,068 With a floating or adjustable rate 120,314 453,969
INVESTING ACTIVITIES U.S. Treasury and Agency Securities. At December 31, 2001, the U.S. Treasury and Agency securities portfolio totaled $185.4 million ($15.5 million acquired from BNB at acquisition), of which $183.5 million was classified as available for sale. The portfolio consisted of $10.8 million in U. S. Treasury securities and $174.6 million in U. S. federal agency securities. The U. S. federal agency security portfolio consists almost exclusively of callable securities. These callable securities provide higher yields than similar securities without call features. At December 31, 2000, the U. S. Treasury and Agency securities portfolio totaled $171.2 million of which $169.2 million was classified as available for sale. 25 State and Municipal Obligations. At December 31, 2001, the portfolio of state and municipal obligations totaled $202.6 million ($40.2 million acquired in the BNB acquisition), of which $143.2 million was classified as available for sale. At that date $59.4 million was classified as held to maturity, with a fair value of $60.3 million. At December 31, 2000, the portfolio of state and municipal obligations totaled $123.9 million, of which $48.9 million was classified as available for sale. At that date, $75.0 million was classified as held to maturity, with a fair value of $74.9 million. Over the past two years, more favorable yields on new purchases of these securities, when compared to other taxable investment alternatives, has led to significant growth in this portfolio. The increase is also reflective of the growth in public deposits and the use of these securities to collateralize those deposits. Mortgage-Backed Securities. At December 31, 2001, the Company had $90.0 million ($23.0 million acquired from BNB at acquisition) in mortgage-backed securities, all classified as available for sale. At December 31, 2000, the Company had $29.1 million in mortgage-backed securities, all classified as available for sale. The significant increase in mortgage-backed securities in 2001 relates to more favorable yields on new purchases of this class of securities. Corporate Bonds. The corporate bond portfolio at December 31, 2001 totaled $7.9 million ($3.1 million acquired in the BNB acquisition), all of which was classified as available for sale. The portfolio was purchased to further diversify the investment portfolio and increase investment yield. The Company's investment policy limits investments in corporate bonds to no more than 10% of total investments and to bonds rated at inception as Baa or better by Moody's Investors Service, Inc. or BBB or better by Standard & Poor's Ratings Services. The corporate bond portfolio at December 31, 2000 totaled $9.3 million, all of which was classified as available for sale. Equity Securities. At December 31, 2001, equity securities totaled $3.8 million, all of which was classified as available for sale. Included in the portfolio is $3.0 million of FHLMC preferred stock. At December 31, 2000, equity securities totaled $1.2 million, all of which was classified as available for sale. SECURITY YIELDS AND MATURITIES SCHEDULE The following table sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company's debt securities portfolio as of December 31, 2001. No tax equivalent adjustments were made to the weighted average yields.
December 31, 2001 --------------------------------------------------------------------------------------------------------- More than One More than Five One Year or Less Year to Five Years Years to Ten Years After Ten Years Total --------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average (Dollars in thousands) Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield --------------------------------------------------------------------------------------------------------- Available for Sale: US Treasury and Agency $18,361 4.45% $ 49,274 5.91% $ 100,961 5.80% $ 14,216 6.24% $ 182,812 5.73% Mortgage-backed securities 686 5.89 19,948 6.07 34,944 5.51 33,818 5.59 89,396 5.66 State and municipal obligations 8,339 4.50 78,753 4.39 48,822 4.40 5,723 4.95 141,637 4.42 Corporate bonds -- -- 3,509 6.61 749 6.22 3,566 8.18 7,824 7.27 ------------------------------------------------------------------------------------------------- Total debt securities available for sale $27,386 4.50% $ 151,484 5.16% $ 185,476 5.38% $ 57,323 5.85% $ 421,669 5.31% ================================================================================================= Held to Maturity: US Treasury and Agency $ 1,950 6.23% $ -- -% $ -- -% $ -- -% $1,950 6.23% State and municipal obligations 29,086 3.87 27,438 4.46 2,162 5.33 645 5.94 59,331 4.22 ------------------------------------------------------------------------------------------------- Total debt securities held to maturity $31,036 4.02% $ 27,438 4.46% $ 2,162 5.33% $ 645 5.94% $ 61,281 4.28% =================================================================================================
26 FUNDING ACTIVITIES BORROWINGS The following table sets forth certain information as to the Company's short-term borrowings for the periods indicated. Short-term borrowings mature in less than one year.
As of and for the year ended December 31 -------------------------------------------- (Dollars in thousands) 2001 2000 1999 --------- --------- --------- Federal funds purchased and securities sold under repurchase agreements $ 60,957 $ 15,950 $ 4,596 FHLB advances 42,135 30,953 41,500 Other short-term borrowings 678 - - -------- ------- -------- Total short-term borrowings $ 103,770 $ 46,903 $ 46,096 ========= ========= ======== Average rate at year-end 2.12% 5.75% 5.77% Average rate during period 3.95% 5.96% 5.02%
The Company had $40.5 million of remaining credit available under lines of credit with the FHLB at December 31, 2001, which are collateralized by FHLB stock and real estate mortgage loans. The Company also had $41.0 million of remaining credit available under unsecured lines of credit with various banks at December 31, 2001. During 2001, the Company also obtained lines of credit with Farmer Mac permitting borrowings to a maximum of $50.0 million. However, no advances were outstanding against those lines at December 31, 2001. Long-term borrowings are summarized as follows:
As of and for the year ended December 31 -------------------------------------------- (Dollars in thousands) 2001 2000 1999 --------- --------- --------- FHLB advances $ 65,154 $ 15,382 $ 8,421 10% Notes - - 1,698 Other 5,265 99 121 -------- ------- -------- Total long-term borrowings $ 70,419 $ 15,481 $ 10,240 ========= ========= =========
At December 31, 2001 and 2000, long-term borrowings primarily include FHLB advances with maturities of more than 1 year. The advances mature on various dates ranging from 2003 through 2011 and bear interest at a fixed weighted average rate of 5.05% as of December 31, 2001. The Company's FHLB advances include $20.0 million in fixed-rate callable borrowings, which can be called by the FHLB on the first anniversary of the borrowing, and quarterly thereafter. Other long-term borrowings consist primarily of a $5.0 million advance on a credit agreement with a bank, which was executed to aid in funding the acquisition of BNB. The credit agreement requires monthly payments of interest only, at a variable interest rate of 1.50% plus LIBOR, with 5.02% being the rate in effect at December 31, 2001. The credit agreement expires April 2003. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATIONS JUNIOR SUBORDINATED DEBENTURES On February 22, 2001, the Company established FISI Statutory Trust I (the "Trust"), which is a statutory business trust formed under Connecticut law, upon filing a certificate of trust with the Connecticut Secretary of State. The Trust exists for the exclusive purposes of (i) issuing and selling 30 year guaranteed preferred beneficial interests in the Corporation's junior subordinated debentures ("capital securities") in the aggregate amount of $16.2 million at a fixed rate of 10.20%, (ii) using the proceeds from the sale of the capital securities to acquire the junior subordinated debentures issued by the Company and (iii) engaging in only those other activities necessary, advisable or incidental thereto. The junior subordinated debentures are the sole assets of the Trust and, accordingly, payments under the corporation obligated junior debentures are the sole revenue of the Trust. All of the common securities of 27 the Trust are owned by the Company. The Company used the net proceeds from the sale of the capital securities to partially fund the BNB acquisition. As of December 31, 2001, all but $3.8 million of the capital securities qualified as Tier I capital under regulatory definitions. The Company's primary source of funds to pay interest on the debentures owed to the Trust are current dividends from its subsidiary banks. Accordingly, the Company's ability to service the debentures is dependent upon the continued ability of the subsidiary banks to pay dividends to the Company. Since the capital securities are classified as debt for financial statement purposes, the tax-deductible expense associated with the capital securities is recorded as interest expense in the consolidated statements of income. The Company incurred $487,000 in costs to issue the securities and the costs are being amortized over 20 years using the straight-line method. DEPOSITS The Banks offer a broad array of core deposit products including checking accounts, interest-bearing transaction accounts, savings and money market accounts and certificates of deposit under $100,000. These core deposits totaled $1,199.2 million or 83.6% of total deposits of $1,433.7 million at December 31, 2001. The core deposit base consists almost exclusively of in-market accounts. Core deposits are supplemented with certificates of deposit over $100,000, which amounted to $234.5 million as of December 31, 2001, largely from in-market municipal, business and individual customers. As of December 31, 2001, brokered certificates of deposit included in certificates of deposit over $100,000 totaled $45.0 million. Total deposits at December 31, 2000 amounted to $1,078.1 million, an increase of $128.6 million or 13.5% from $949.5 million at December 31, 1999. Core deposit products were $784.3 million or 72.7% of total deposits at December 31, 2000. Certificates of deposit over $100,000 totaled $293.8 million at December 31, 2000, which included $15.0 million in brokered certificates of deposit. The daily average balances, percentage composition and weighted average rates paid on deposits for each of the years ended December 31, 2001, 2000 and 1999 are presented below: For the year ended December 31
----------------------------------------------------------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------------- Percent Percent Percent Of Total Weighted Of Total Weighted Of Total Weighted Average Average Average Average Average Average Average Average Average (Dollars in thousands) Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate ----------------------------------------------------------------------------------- Interest-bearing checking $ 172,022 13.2% 1.23% $ 113,344 11.4% 1.36% $ 105,076 11.8% 1.34% Savings and money market 253,128 19.4 2.07 193,027 19.3 2.66 183,800 20.7 2.43 Certificates of deposit under $100,000 376,256 28.9 5.36 294,926 29.5 5.63 280,953 31.6 5.22 Certificates of deposit over $100,000 319,974 24.6 4.97 260,757 26.1 6.32 190,942 21.5 5.18 Non-interest bearing accounts 181,831 13.9 - 136,614 13.7 - 127,899 14.4 - ----------------------------------------------------------------------------------- Total average deposits $1,303,211 100.0% 3.33% $ 998,668 100.0% 3.98% $ 888,670 100.0% 3.78% ===================================================================================
The following table indicates the amount of the Company's certificates of deposit by time remaining until maturity as of December 31, 2001:
At December 31, 2001 -------------------------------------------------------------------------------------------- 3 Months Over 3 To Over 6 To Over 12 Or Less 6 Months 12 Months Months Total --------------------------------------------------------------------- (Dollars in thousands) Certificates of deposit less than $100,000 $ 112,087 $ 99,973 $ 111,322 $ 78,634 $ 402,016 Certificates of deposit Of $100,000 or more 101,703 33,955 68,695 30,098 234,451 ---------- ---------- ---------- ---------- ---------- Total certificates of deposit $ 213,790 $ 133,928 $ 180,017 $ 108,732 $ 636,467 ============ ============ ========== ========== ==========
28 NET INCOME ANALYSIS AVERAGE BALANCE SHEET The following table sets forth certain information relating to the Company's consolidated statements of financial condition and reflects the average yields earned on interest-earning assets, as well as the average rates paid on interest-bearing liabilities for the years indicated. Such yields and rates were derived by dividing interest income or expense by the average balances of interest-earning assets or interest-bearing liabilities, respectively, for the years shown. Tax equivalent adjustments have been made. All average balances are average daily balances. Nonaccruing loans are included in the yield calculations in this table.
Year ended December 31 ------------------------------------------------------------------------------------------- 2001 2000 1999 ----------------------------- ------------------------------ ------------------------------ Average Interest Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/Yield/ (Dollars in thousands) Balance Paid Rate Balance Paid Rate Balance Paid Rate ----------------------------- ------------------------------ ------------------------------ Interest-earning assets: Federal funds sold and interest bearing deposits $ 8,634 $ 358 4.15% $ 3,039 $ 184 6.05% $ 8,529 $ 428 5.02% Investment securities (1) 421,945 26,567 6.30 308,643 20,324 6.58 274,290 17,203 6.27 Loans (2) 1,056,720 91,482 8.66 825,953 78,538 9.51 700,062 63,417 9.06 --------- -------- ------- --------- --------- ------ --------- ---------- ------ Total interest-earning assets 1,487,299 118,407 7.96 1,137,635 99,046 8.70 982,881 81,048 8.24 Allowance for loan losses (16,825) (12,509) (10,261) Other non-interest earning assets 117,698 72,390 63,841 -------- --------- --------- Total assets $1,588,172 $1,197,516 $1,036,461 ========= ========= ========= Interest-bearing liabilities: Savings and money market $ 253,128 $ 5,244 2.07% $ 193,027 $ 5,135 2.66% $ 183,800 $ 4,461 2.43% Interest-bearing checking 172,022 2,110 1.23 113,344 1,537 1.36 105,076 1,408 1.34 Certificates of deposit 696,230 36,060 5.18 555,683 33,086 5.95 471,895 24,551 5.20 Borrowed funds 107,530 4,840 4.50 60,978 3,847 6.31 26,398 1,463 5.54 Guaranteed preferred beneficial interests in corporations junior subordinated debentures 13,892 1,440 10.37 - - - - - - -------- -------- ------- --------- --------- ------ --------- ---------- ------ Total interest-bearing liabilities 1,242,802 49,694 4.00 923,032 43,605 4.72 787,169 31,883 4.05 -------- -------- ------- --------- --------- ------ --------- ---------- ------ Non-interest bearing demand deposits 181,831 136,614 127,899 Other non-interest-bearing liabilities 21,318 14,906 14,091 --------- -------- ------- Total liabilities 1,445,951 1,074,552 929,159 Stockholders' equity (3) 142,221 122,964 107,302 -------- --------- --------- Total liabilities and stockholders' equity $1,588,172 $1,197,516 $1,036,461 ========== ========== ========== Net interest income $ 68,713 $ 55,441 $ 49,165 ======= ======== ========= Net interest rate spread 3.96% 3.98% 4.19% ======= ====== ====== Net earning assets $ 244,497 $ 214,603 $ 195,712 ======== ========= ======== Net interest income as a percentage of average interest-earning assets 4.62% 4.87% 5.00% ========== =========== ===== Ratio of average interest-earning assets to average interest-bearing liabilities 119.67% 123.25% 124.86% ====== ====== ====== (1) Amounts shown are amortized cost for held to maturity securities and fair value for available for sale securities. In order to make pre-tax income and resultant yields on tax-exempt securities comparable to those on taxable securities and loans, a tax-equivalent adjustment to interest earned from tax-exempt securities has been computed using a federal tax rate of 35%. (2) Net of deferred loan fees and costs, and loan discounts and premiums. (3) Includes unrealized gains/(losses) on securities available for sale.
29 NET INTEREST INCOME Net interest income, the principal source of the Company's earnings, was $64.8 million in 2001, an $11.9 million or 22.5% increase over 2000. The significant increase relates primarily to the acquisition of BNB, as net interest income for BNB during 2001 amounted to $8.2 million. Average earning assets increased 30.7% to $1,487.3 million for the year ended December 31, 2001. The growth in earning assets was partially offset by a 25 basis point decline in net interest margin. Net interest income was $52.9 million in 2000 compared with $47.0 million in 1999, an increase of 12.6%. Average earning assets grew by $154.7 million in 2000, or 15.7% over 1999, which offset the effects of a 13 basis point decline in the net interest margin. Net interest margin, on a tax-equivalent basis, was 4.62% for 2001, 4.87% for 2000 and 5.00% for 1999. The decline in net interest margin in 2001 can be attributed to a number of factors which include: the declining rate environment, increased competitive rate pressures for additional loan assets and the continuing shift in the mix of funding sources. The yield on interest-earning assets declined 74 basis points to 7.96% in 2001, from 8.70% in 2000, after increasing from 8.24% in 1999. Similarly, the cost of interest-bearing liabilities decreased 72 basis points to 4.00% in 2001 from 4.72% in 2000, after increasing from 4.05% in 1999. RATE/VOLUME ANALYSIS 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: (i) changes attributable to changes in volume (changes in volume multiplied by current year rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) 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 the changes due to rate. Year ended December 31
------------------------------------------------------------------------ 2001 vs 2000 2000 vs 1999 ------------------------------------------------------------------------ Increase/(Decrease) Total Increase/(Decrease) Total Due To Increase/ Due To Increase/ (Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease) ------------------------------------------------------------------------ Interest-earning assets: Federal funds sold and Interest - bearing deposits $ 232 $ (58) $ 174 $ (331) $ 87 $ (244) Investment securities 7,110 (867) 6,243 2,254 867 3,121 Loans 20,007 (7,063) 12,944 12,060 3,061 15,121 ---------- -------- ---------- ---------- ------- ---------- Total interest-earning assets 27,349 (7,988) 19,361 13,983 4,015 17,998 ========== ======== ========== ========== ======= ========== Interest-bearing liabilities: Savings and money market 721 (148) 573 239 435 674 Interest-bearing checking 1,431 (1,322) 109 108 21 129 Certificates of deposit 7,329 (4,355) 2,974 4,959 3,576 8,535 Borrowed funds 2,108 (1,115) 993 2,181 203 2,384 Guaranteed preferred beneficial interests in corporation's junior subordinated debentures 1,440 - 1,440 - - - ---------- -------- ---------- ---------- ------- ---------- Total interest-bearing liabilities 13,029 (6,940) 6,089 7,487 4,235 11,722 ========== ========- ========== ========== ======= ========== Net interest income $ 14,320 $ (1,048) $ 13,272 $ 6,496 $ (220) $ 6,276 ========== ======== ========== ========= ======= ==========
30 PROVISION FOR LOAN LOSSES The provision for loan losses represents management's estimate of the expense necessary to maintain the allowance for loan losses at an adequate level for losses inherent in the portfolio. The provision for loan losses was $5.0 million in 2001, compared to $4.2 million in 2000 and $3.1 million in 1999. The allowance for loan losses increased due to allowance acquired in the BNB acquisition, as well as the significant growth in commercial, commercial real estate, and consumer loans. Also, the Company provided for the additional exposure in the portfolio related to the softening of the economy throughout the year. Nonperforming loans were $10.0 million at December 31, 2001, representing 0.86% of total loans outstanding at year-end. Nonperforming loans at year-end 2000 were $7.1 million, representing 0.80% of total loans outstanding. In 2001 net loan charge-offs were $2.5 million or 0.23% of average loans, compared to net loan charge-offs of $1.7 million or 0.21% of average loans for 2000. The ratio of the allowance for loan losses to nonperforming loans at December 31, 2001 was 190.32%, down slightly from 195.06% at December 31, 2000. The ratio of allowance for loan losses to total loans improved to 1.64% at December 31 ,2001 in comparison to 1.56% at December 31, 2000. NONINTEREST INCOME The following table presents the major categories of noninterest income during the years indicated:
Year Ended December 31 -------------------------------------------- (Dollars in thousands) 2001 2000 1999 ---- ---- ---- Service charges on deposits.......................... $ 7,653 $ 5,003 $ 4,289 Financial services group fees and commissions........ 2,690 1,151 945 Mortgage banking activities.......................... 2,190 1,536 1,343 Gain on sale or call of securities................... 531 27 71 Other................................................ 2,718 1,692 1,407 --------- -------- --------- Total noninterest income........................... $ 15,782 $ 9,409 $ 8,055 ========= ========= =========
Noninterest income increased 67.7% to $15.8 million in 2001 compared to $9.4 million in 2000. This increase is partially attributed to $2.9 million in noninterest income generated by the acquired companies, BNB and BGI. Service charges on deposit accounts increased significantly in 2001, which reflects the benefit of the continuing growth in core deposits and the related fee-based products and services. The increase in mortgage banking activities results from the increase in the gain on sale of residential mortgage loans and an increase in the serviced loan portfolio. The increase in financial services group fees and commissions reflects the ongoing expansion of the financial services line of business. FIGI, the Company's brokerage subsidiary, commenced operations in March 2000, enabling FII to retain a higher portion of commissions on mutual fund sales. Also, BGI was acquired during October 2001 and contributed to the increase. FII has focused on growing fee income, in particular from the financial services group, thus the integration of BGI with the Company's existing businesses is expected to further enhance FII's ability to generate fee income. The increase in gain on the sale or call of securities during 2001 reflects gains recorded as a result of callable agency bonds, which were acquired at a discount, being called due to the declining interest rate environment in 2001. Noninterest income increased 16.8% to $9.4 million in 2000 compared to $8.1 million in 1999. The increase primarily falls out from the increase in service charges on deposit accounts, which increased $714,000, or 16.6%, to $5.0 million in 2000 from $4.3 million in 1999, a reflection of core deposit growth. 31 NONINTEREST EXPENSE The following table presents the major categories of noninterest expense during the years indicated:
Year Ended December 31 -------------------------------------------- (Dollars in thousands) 2001 2000 1999 ---- ---- ---- Salaries and employee benefits....................... $ 22,958 $ 16,803 $ 14,801 Occupancy and equipment.............................. 6,050 4,614 4,491 Supplies and postage................................. 1,959 1,500 1,403 Amortization of goodwill and other intangible assets. 2,381 737 839 Professional fees.................................... 1,293 826 618 Advertising.......................................... 839 637 574 Other real estate.................................... 255 126 259 Other expense........................................ 7,617 4,913 4,047 --------- -------- --------- Total noninterest expense.......................... $ 43,352 $ 30,156 $ 27,032 ========= ========= =========
Noninterest expense increased 43.7% to $43.4 million in 2001 compared to $30.2 million in 2000. This increase is partially attributed to $6.2 million in noninterest expense from the acquired companies, BNB and BGI. The Company's largest component of noninterest expense, salaries and employee benefits, increased 36.6% and 13.5% in the years 2001 and 2000, respectively, a reflection of staffing additions from BNB and other additions necessary to support the Company's growth. The increase also results from overhead coupled with integrating the newly acquired companies, expenditures associated with maintaining the Company's investment in technology and costs connected with opening new branch offices. In addition, goodwill amortization expense recognized on the BNB acquisition amounted to $1.7 million in 2001. The amortization of goodwill ceased on January 1, 2002 with the adoption of SFAS No. 142. Even with these expenditures, the Company's efficiency ratio, which measures the amount of overhead required to produce a dollar of revenue, remained at a relatively low level. For the years ended December 31, 2001, 2000 and 1999 the efficiency ratio was 48.5%, 45.2% and 45.6%, respectively. Noninterest expense increased 11.6% in 2000 and 9.9% in 1999 primarily from investments in human resources, facilities and technology. During these years, the Company added features to technological capabilities including: internet banking, check imaging and upgrades to overall data processing capabilities. INCOME TAX EXPENSE The provision for income taxes provides for Federal and New York State income taxes, which amounted to $11.0 million, $9.8 million and $8.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. The increasing trend corresponds to increased levels of taxable income. The effective tax rate for 2001 was 34.2%, compared to 35.1% in 2000 and 35.6% in 1999. The decrease in the effective tax rate from 2001 to 2000 was primarily attributable to an increase in holdings of tax exempt securities, which was partially offset by non-deductible goodwill amortization expense resulting from the BNB acquisition. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued SFAS Nos. 141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method, use of the pooling-of-interests method is no longer permitted for business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill (including goodwill reported in prior acquisitions) no longer be amortized to earnings, but instead be reviewed for impairment annually, with impairment losses charged to earnings when they occur. The Company is required to adopt SFAS No. 142 effective January 1, 2002. The results of operations for year ended December 31, 2001 include goodwill amortization from the BNB acquisition of $1,653,000. The amortization of goodwill ceased effective January 1, 2002. 32 LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY The objective of maintaining adequate liquidity is to assure the ability of the Company and its subsidiaries to meet their financial obligations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, the ability to fund new and existing loan commitments and the ability to take advantage of new business opportunities. The Company and its subsidiaries achieve liquidity by maintaining a strong base of core customer funds, maturing short-term assets, the ability to sell securities, lines of credit, and access to capital markets. Liquidity at the subsidiary bank level is managed through the monitoring of anticipated changes in loans, core deposits, and wholesale funds. The strength of the subsidiary bank's liquidity position is a result of its base of core customer deposits. These core deposits are supplemented by wholesale funding sources which include credit lines with the other banking institutions, the FHLB, Farmer Mac, and the Federal Reserve Bank. The primary source of liquidity for the parent company is dividends from subsidiaries, lines of credit, and access to capital markets. Dividends from subsidiaries are limited by various regulatory requirements related to capital adequacy and earnings trends. The Company's subsidiaries rely on cash flows from operations, core deposits, borrowings, short-term liquid assets, and, in the case of non-banking subsidiaries, funds from the parent company. Total deposits at December 31, 2001 were $1,434 million an increase of $356 million from $1,078 million at December 31, 2000. At the time of acquisition, total deposits of BNB were $232 million. The remaining growth of $124 million was the result of gaining greater market share in the Company's existing markets. Maintenance and growth in the Company's deposits is dependent upon overall economic conditions and the Company's deposit product features, price, and service profile relative to competitors. Total borrowings and trust preferred securities were $190 million, at December 31, 2001, an increase of $128 million from $62 million at December 31, 2000. At the time of acquisition, total borrowings of BNB were $36 million. Total short-term borrowing were $104 million at December 31, 2001 compared to $47 million at December 31, 2000, while total long-term borrowings were $70 million at December 31, 2001 compared to $15 million at December 31, 2000. The Company formed a trust in February 2001 to accommodate the private placement of $16.2 million in trust preferred securities, the proceeds of which were utilized to partially fund the acquisition of BNB. Short-term borrowings consist principally of federal funds purchased, securities sold under repurchase agreements, and FHLB advances. Lines of credit extended to the Company in the form of federal funds by other banking institutions are principally dependent upon the financial strength of the Company, generally as measured by earnings performance and capital levels. FHLB lines are dependent upon the Company's membership in the FHLB System and the strength of its capital position with advances required to be collateralized with available eligible loans or securities. Securities sold under repurchase agreements are dependent upon the availability of unpledged securities and the offering to customers of competitive terms and pricing. Long-term borrowings consist principally of advances from the FHLB. At December 31, 2001, the Company had remaining credit available of $40.5 million under lines of credit with the FHLB and $41.0 million with various banking institutions. During 2001, the Company also obtained lines of credit with Farmer Mac permitting borrowings to a maximum of $50.0 million to be secured by eligible loan collateral. No advances were outstanding against the Farmer Mac line at December 31, 2001. The Company's cash and cash equivalents were $53 million at December 31, 2001, an increase of $23 million from the balance of $30 million at December 31, 2000. The company generated $209 million in net cash from financing activities and $28 million in net cash from operating activities that collectively was utilized in providing $214 million to investing activities, with the balance of $23 million increasing the 33 Company's cash and cash equivalents. The principal sources of cash from financing activities were $124 million from net increase in deposits, $75 million from net increase in borrowings, and $16 million from the issuance of guaranteed preferred beneficial interests in Corporation's junior subordinated debentures, partially offset by $7 million in dividend payments. The principal source of net cash from operating activities is the Company's net income of $21 million supplemented by non-cash earnings charges of $6 million from depreciation and amortization expense and $5 million for provision for loan losses. The Company utilized its cash in the following investing activities: $70 million in the net acquisition of securities, $90 million in the net origination of loans, $4 million in the net acquisition of premises and equipment, and $49 million in the acquisition of BNC and BGI. An additional source of liquidity to the Company is provided from its ability to limit its investing activities and/or dispose of its securities and loans. Additional liquidity can be provided to the Company through limiting the growth in loans by offering terms and pricing that would not be competitive. Securities available for sale and newly originated loans could be sold to provide additional liquidity. The fair value of assets being sold is dependent upon market conditions at the time of sale and potentially could adversely affect the Company's earnings. In the normal course of business the Company has outstanding commitments to extend credit which are not reflected in the Company's consolidated financial statements. The commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2001 letters of credit totaling $9 million and unused loan commitments of $266 million were contractually available. Comparable amounts for these commitments at December 31, 2000 were $7 million and $183 million, respectively. The total commitment amounts do not necessarily represent future cash requirements as many of the commitments are expected to expire without funding. CAPITAL RESOURCES The Company's total shareholders' equity consists of common equity and perpetual preferred stock. The Company's equity changes from the issuance of new shares, the purchase of existing shares, from retained earnings, and from accumulated other comprehensive income. Retained earnings are affected by net income and dividends paid on common and preferred stock. Accumulated other comprehensive income is affected by the fair value of securities available for sale. The following table summarizes the changes in the Company's shareholders' equity for the years ended December 31, 2001, 2000, and 1999:
Change in Accumulated Change in Total Other Total Net Dividends Retained Shares Shares Comprehensive Shareholders' (Dollars in thousands) Income Declared Earnings Issued Purchased Income Equity ------ -------- -------- ------ --------- ------ ------ 2001 $21,213 $(6,775) $14,438 $827 $(16) $2,320 $17,569 2000 18,100 (6,113) 11,987 29 (454) 2,517 14,079 1999 15,957 (4,763) 11,194 13,623 (54) (3,802) 20,961
For 2001 the Company's total equity increased $17.6 million, principally from an increase in retained earnings of $14.4 million. The increase in retained earnings is the result of $21.2 million in net income net of the payout of $6.8 million or 31.9% of those earnings in dividends to common and preferred shareholders. For 2000 the Company's total equity increased $14.1 million, principally from retained earnings of $12.0 million. The increase in retained earnings is the result of $18.1 million in net income and net of the payout of $6.1 million or 33.8% of those earnings in dividends to common and preferred shareholders. For 1999 total equity increased $21.0 million from two principal sources: $13.6 million from the sale of 1,103,333 shares of the common stock and $11.2 million from retained earnings. The increase in retained earnings is the result of $16.0 million in net income and the payout of $4.8 million, or 29.8%, of those earnings in dividends to common and preferred shareholders. 34 The Federal Reserve Board has adopted a system using risk-based capital guidelines to evaluate the capital adequacy of bank holding companies. The guidelines require a minimum total risk-based capital ratio of 8.0%. Leverage ratio is also utilized in assessing capital adequacy with a minimum requirement that can range from 3.0% to 5.0%. The following table reflects the changes in the components of those ratios:
(Dollars in thousands) 2001 2000 1999 ----------- ----------- ----------- Total shareholders' equity $ 149,187 $ 131,618 $ 117,539 Less: Unrealized gains/(losses) 2,176 (144) (2,661) Goodwill and other intangible assets 39,166 2,381 3,118 Disallowed mortgage servicing asset 90 - - Plus: Minority interests in consolidated subsidiaries 475 458 475 Qualifying trust preferred securities 12,408 - - ----------- ----------- ----------- Total Tier 1 capital $ 120,638 $ 129,839 $ 117,557 =========== =========== =========== Adjusted average assets $ 1,718,034 $ 1,273,657 $ 1,088,404 Tier 1 leverage ratio 7.02% 10.19% 10.80% Total Tier 1 capital $ 120,638 $ 129,839 $ 117,557 Plus: Qualifying allowance for loan losses 15,417 11,607 9,855 Qualifying trust preferred securities 3,792 - - ----------- ----------- ----------- Total risk-based capital $ 139,847 $ 141,446 $ 127,412 =========== =========== =========== Net risk-weighted assets $ 1,229,811 $ 926,291 $ 786,840 Total risk-based capital ratio 11.37% 15.27% 16.19%
The Company's Tier 1 leverage ratio was 7.02% at December 31, 2001 and is well-above minimum regulatory capital requirements. The ratio declined from 10.19% at December 31, 2000, principally as a result of the acquisition BNB. Total Tier 1 capital of $120.6 million at December 31, 2001 declined $9.3 million from $129.8 million at December 31, 2000. The decrease in Tier 1 capital directly relates to the recording of $37.2 million in goodwill for the BNB acquisition that was partially offset by retained earnings of $14.4 million in 2001 and the issuance of $16.2 million in trust preferred securities in February 2001 of which $12.4 million qualified as Tier 1 capital. Also contributing to the decline in the leverage ratio was an increase of $444.4 million in adjusted average assets to $1,718.0 million at December 31, 2001. The increase in adjusted average assets relates to BNB, which had $289 million in total assets at the time of acquisition. The Company's total risk-weighted capital ratio was 11.37% at December 31, 2001 and is well-above minimum regulatory capital requirements. The ratio declined from 15.27% at December 31, 2000, which is principally a result of the BNB acquisition. Total risk-based capital was $139.9 million at December 31, 2001 a decline of $1.5 million from $141.4 million at December 31, 2000. The decline is attributed to a $9.3 million decrease in Tier 1 capital which was partially offset by a $3.8 million increase in qualifying allowance for loan losses, and $3.8 million in trust preferred securities that did not qualify for Tier 1 capital treatment. 35 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK The principal objective of the Company's interest rate risk management is to evaluate the interest rate risk inherent in certain assets and liabilities, determine the appropriate level of risk to the Company given its business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with the guidelines approved by the Company's Board of Directors. The Company's senior management is responsible for reviewing with the Board its activities and strategies, the effect of those strategies on the net interest margin, the fair value of the portfolio and the effect that changes in interest rates will have on the portfolio and exposure limits. Senior Management develops an Asset-Liability Policy that meets strategic objectives and regularly reviews the activities of the subsidiary banks. Each subsidiary bank board adopts an Asset-Liability Policy within the parameters of the overall FII Asset-Liability Policy and utilizes an asset/liability committee comprised of senior management of the bank under the direction of the bank's board. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring the Company's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or re-price within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or re-pricing within a specific time period and the amount of interest-bearing liabilities maturing or re-pricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. At December 31, 2001, the one-year gap position, the difference between the amount of interest-earning assets maturing or re-pricing within one year and interest-bearing liabilities maturing or re-pricing within one year, was $168.7 million, or 9.4% of total assets. Accordingly, over the one-year period following December 31, 2001, the Company will have $168.7 million more in liabilities re-pricing than assets. Generally if rate-sensitive assets re-price sooner than rate-sensitive liabilities, earnings will be positively impacted in a rising rate environment. Conversely, in a declining rate environment, earnings will generally be negatively impacted. If rate-sensitive liabilities re-price sooner than rate-sensitive assets then generally earnings will be negatively impacted in a rising rate environment. Conversely, in a declining rate environment earnings will generally be positively impacted. Management believes that the negative gap position at December 31, 2001 will not have a material adverse effect on the Company's operating results. GAP ANALYSIS The following table (the "Gap Table") sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2001 which management anticipates, based upon certain assumptions, to re-price or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which re-price or mature during a particular period were determined in accordance with the earlier of the re-pricing date or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected re-pricing of assets and liabilities at December 31, 2001, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments within the selected time intervals. All non-maturity deposits (demand deposits and savings deposits) were assumed to become rate sensitive over time, with 1%, 3%, 4%, 15%, 14% and 63% of such deposits assumed to re-price in the periods of less than 30 days, 31 to 180 days, 181 to 365 days, 1 to 3 years, 3 to 5 years and more than 5 years, respectively. Prepayment and re-pricing rates can have a significant impact on the estimated gap. While management believes the assumptions used in modeling the Gap are reasonable, there can be no assurances. 36 Gap Table
December 31, 2001 --------------------------------------------------------------------------------------- Volumes Subject to Repricing Within --------------------------------------------------------------------------------------- 0-30 31-180 181-365 1-3 3-5 >5 Non- (Dollars in thousands) days days days years years years Sensitive Total --------------------------------------------------------------------------------------- Interest-earning assets: Federal funds sold and and interest-bearing deposits $1,000 $ - $ 180 $ - $ - $ - $ - $ 1,180 Investment securities (1) 21,733 68,549 68,363 131,637 45,048 154,374 - 489,704 Loans (2) 50,185 156,400 119,009 264,440 179,791 393,978 2,247 1,166,050 --------- ------- ------- ------- ------- ------- ------ --------- Total interest-earning assets 72,918 224,949 187,552 396,077 224,839 548,352 2,247 1,656,934 --------- ------- ------- ------- ------- ------- ------ --------- Interest-bearing liabilities: Interest-bearing checking, savings and money market deposits 3,465 17,324 20,788 83,154 83,153 364,679 - 572,563 Certificates of deposit 138,836 229,034 172,835 83,705 12,016 41 - 636,467 Borrowed funds (3) 30,990 30,764 10,123 36,134 12,460 69,918 - 190,389 --------- ------- -------- -------- ------ ------ ------ -------- Total interest-bearing liabilities 173,291 277,122 203,746 202,993 107,629 434,638 - 1,399,419 --------- ------- ------- ------- ------- ------- ------- --------- Period gap $(100,373) $ (52,173) $ (16,194) $193,084 $117,210 $113,714 $ 2,247 $ 257,515 ========= ========= ======== ======== ======== ======== ======= ========== Cumulative gap $(100,373) $ (152,546) $(168,740) $ 24,344 $141,554 $ 255,268 $257,515 $ - ======== ========== ========= ======== ======== ======== ======== ========== Period gap to total assets (5.59%) (2.91%) (0.90%) 10.76% 6.53% 6.34% 0.13% 14.35% ========= ========= ========= ======= ======= ======== ======== ========== Cumulative gap to total assets (5.59%) (8.50%) (9.40%) 1.36% 7.89% 14.23% 14.35% ========= ========= ======= ======= ====== ======= ====== Cumulative interest-earning assets to cumulative interest- bearing liabilities 42.08% 66.13% 74.21% 102.84% 114.67% 118.24% 118.40% ========= ======== ====== ====== ======= ======= ====== (1) Amounts shown include the amortized cost of held to maturity securities and the fair value of available for sale securities. (2) Amounts shown include principal balance net of deferred loan fees and costs, unamortized premiums and discounts. (3) Amounts shown include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures.
Certain shortcomings are inherent in the method of analysis presented in the Gap Table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates, both on a short-term basis and over the life of the asset. Further, in the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. As a result of these shortcomings, the Company directs more attention on simulation modeling, such as "net interest income at risk" discussed below, rather than gap analysis. Even though the gap analysis reflects a ratio of cumulative gap to total assets within acceptable limits, the net interest income at risk simulation modeling is considered by management to be more informative in forecasting future income at risk. 37 NET INTEREST INCOME AT RISK ANALYSIS In addition to the Gap Analysis, management uses a "rate shock" simulation to measure the rate sensitivity of the balance sheet. Rate shock simulation is a modeling technique used to estimate the impact of changes in rates on net interest income and economic value of equity. The following table sets forth the results of the modeling analysis at December 31, 2001:
Change in Interest Rates in Basis Points Net Interest Income Economic Value of Equity ---------------------------------- ---------------------------------- (Rate Shock) Amount $ Change % Change Amount $ Change % Change ------------ ------ -------- -------- ------ -------- -------- (Dollars in thousands) 200 $79,677 $3,281 4.29% $311,101 $7,520 2.48% 100 78,266 1,870 2.45% 307,475 3,894 1.28% Static 76,396 - - 303,581 - - (100) 74,664 (1,732) (2.27%) 299,504 (4,077) (1.34%) (200) 73,249 (3,147) (4.12%) 292,693 (10,888) (3.59%)
The Company measures net interest income at risk by estimating the changes in net interest income resulting from instantaneous and sustained parallel shifts in interest rates of plus or minus 200 basis points over a period of 12 months. As of December 31, 2001, a 200 basis point increase in rates would increase net interest income by $3.3 million, or 4.29%, over the next twelve month period. Conversely, a 200 basis point decrease in rates would decrease net interest income by $3.1 million, or 4.12%, over a 12 month period. This simulation is based on management's assumption as to the effect of interest rate changes on assets and liabilities and assumes a parallel shift of the yield curve. It also includes certain assumptions about the future pricing of loans and deposits in response to changes in interest rates. Further, it assumes that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case. While this simulation is a useful measure as to net interest income at risk due to a change in interest rates, it is not a forecast of the future results and is based on many assumptions that, if changed, could cause a different outcome. 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2001 AND 2000 (Dollars in thousands, except per share amounts) 2001 2000 ------------- ------------- ASSETS Cash, due from banks and interest-bearing deposits $ 52,171 $ 29,226 Federal funds sold 1,000 926 Securities available for sale, at fair value 428,423 257,823 Securities held to maturity (fair value of $62,317 and $76,884 at December 31, 2001 and 2000, respectively) 61,281 76,947 Loans, net 1,146,976 873,262 Premises and equipment, net 24,467 18,423 Goodwill and other intangible assets 39,166 2,381 Other assets 40,812 30,339 ---------- ----------- Total assets $ 1,794,296 $ 1,289,327 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Demand $ 224,628 $ 162,840 Savings, money market and interest-bearing checking 572,563 309,732 Certificates of deposit 636,467 605,539 ---------- ----------- Total deposits 1,433,658 1,078,111 Short-term borrowings 103,770 46,903 Long-term borrowings 70,419 15,481 Guaranteed preferred beneficial interests in corporation's junior subordinated debentures 16,200 - Accrued expenses and other liabilities 21,062 17,214 ---------- ----------- Total liabilities 1,645,109 1,157,709 Shareholders' equity: 3% cumulative preferred stock, $100 par value, authorized 10,000 shares, issued and outstanding 1,666 shares in 2001 and 1,711 shares in 2000 167 171 8.48% cumulative preferred stock, $100 par value, authorized 200,000 shares, issued and outstanding 175,855 shares in 2001 and 175,866 shares in 2000 17,585 17,587 Common stock, $ 0.01 par value, authorized 50,000,000 shares, issued 11,303,533 shares in 2001 and 2000 113 113 Additional paid-in capital 17,195 16,472 Retained earnings 112,786 98,348 Accumulated other comprehensive income (loss) 2,176 (144) Treasury stock, at cost - 282,219 shares in 2001 and 316,812 shares in 2000 (835) (929) ---------- ----------- Total shareholders' equity 149,187 131,618 ---------- ----------- Total liabilities and shareholders' equity $ 1,794,296 $ 1,289,327 ========== =========== See accompanying notes to consolidated financial statements.
39
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Dollars in thousands, except per share amounts) 2001 2000 1999 ----------- ----------- ----------- Interest income: Loans $ 91,482 $ 78,538 $ 63,417 Securities 22,628 17,745 14,847 Other 358 184 428 ----------- ----------- ----------- Total interest income 114,468 96,467 78,692 ----------- ----------- ----------- Interest expense: Deposits 43,414 39,758 30,420 Borrowings 4,840 3,847 1,463 Guaranteed preferred beneficial interests in corporation's junior subordinated debentures 1,440 - - ----------- ----------- ----------- Total interest expense 49,694 43,605 31,883 ----------- ----------- ----------- Net interest income 64,774 52,862 46,809 Provision for loan losses 4,958 4,211 3,062 ----------- ----------- ----------- Net interest income after provision for loan losses 59,816 48,651 43,747 ----------- ----------- ----------- Noninterest income: Service charges on deposits 7,653 5,003 4,289 Financial services group fees and commissions 2,690 1,151 945 Mortgage banking activities 2,190 1,536 1,343 Gain on sale and call of securities 531 27 71 Other 2,718 1,692 1,407 ----------- ----------- ----------- Total noninterest income 15,782 9,409 8,055 ----------- ----------- ----------- Noninterest expense: Salaries and employee benefits 22,958 16,803 14,801 Occupancy and equipment 6,050 4,614 4,491 Supplies and postage 1,959 1,500 1,403 Amortization of goodwill and other intangible assets 2,381 737 839 Other 10,004 6,502 5,498 ----------- ----------- ----------- Total noninterest expense 43,352 30,156 27,032 ----------- ----------- ----------- Income before income taxes 32,246 27,904 24,770 Income taxes 11,033 9,804 8,813 ----------- ----------- ----------- Net income $ 21,213 $ 18,100 $ 15,957 ========== ========== ========== Earnings per common share: Basic $ 1.79 $ 1.51 $ 1.38 Diluted $ 1.77 $ 1.51 $ 1.38 See accompanying notes to consolidated financial statements.
40
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Accumulated Other 3% 8.48% Additional Comprehensive Total (Dollars in thousands, Preferred Preferred Common Paid in Retained Income Treasury Shareholders' except per share amounts) Stock Stock 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 83 shares of 3% preferred stock (8) - - 4 - - - (4) Purchase of 378 shares of 8.48% preferred - (37) - (5) - - - (42) stock Purchase of 1,000 shares of common stock - - - - - - (8) (8) Comprehensive income Net income - - - - 15,957 - - 15,957 Unrealized loss on securities available for sale (net of tax of ($2,606)) - - - - - (3,759) - (3,759) Less: Reclassification adjustment for gains included in net income (net of tax of $28) - - - - - (43) - (43) --------- Net unrealized loss on securities available for sale (net of tax of ($2,637)) - - - - - - - (3,802) --------- Total comprehensive income - - - - - - - 12,155 --------- Cash dividends declared: 3% Preferred - $3.00 per share - - - - (5) - - (5) 8.48% Preferred - $8.48 per share - - - - (1,498) - - (1,498) Common - $0.311 per share - - - - (3,260) - - (3,260) Issuance of 1,103,133 shares of common stock through initial public offering, net of costs - - 11 13,612 - - 13,623 ------ ----- ------ ----- ------ ------ ---- -------- Balance - December 31, 1999 $ 176 $ 17,636 $ 113 $16,448 $86,361 $ (2,661) $ (534) $ 117,539 Purchase of 48 shares of 3% preferred stock (5) - - 3 - - - (2) Purchase of 490 shares of 8.48% preferred stock - (49) - (2) - - - (51) Purchase of 33,300 shares of common stock - - - - - - (401) (401) Issue 2,288 shares of common stock-directors plan - - - 23 - - 6 29 Comprehensive income: Net income - - - - 18,100 - - 18,100 Unrealized gain on securities available for sale (net of tax of $1,757) - - - - - 2,533 - 2,533 Less: Reclassification adjustment for gains included in net income (net of tax of $11) - - - - - (16) - ------- (16) Net unrealized gain on securities available for sale (net of tax of $1,746) - - - - - - - 2,517 -------- Total comprehensive income - - - - - - - 20,617 -------- Cash dividends declared: 3% Preferred - $3.00 per share - - - - (5) - - (5) 8.48% Preferred - $8.48 per share - - - - (1,491) - - (1,491) Common - $0.42 per share - - - - (4,617) - - (4,617) ----- ------- ----- ------- ------- ----- ----- ------ Balance - December 31, 2000 $ 171 $ 17,587 $ 113 $ 16,472 $ 98,348 $ (144) $ (929) $ 131,618 Purchase of 45 shares of 3% preferred stock (4) - - 2 - - - (2) Purchase of 11 shares of 8.48% preferred stock - (2) - - - - - (2) Purchase of 1,000 shares of common stock - - - - - - (12) (12) Issue 1,141 shares of common stock-directors plan - - - 23 - - 4 27 Issue 34,452 shares of common stock -acquisition of Burke Group, Inc. - - - 698 - - 102 800 Comprehensive income: Net income - - - - 21,213 - - 21,213 Unrealized gain on securities available for sale (net of tax of $1,803) - - - - - 2,636 - 2,636 Less: Reclassification adjustment for gains included in net income (net of tax of $215) - - - - - (316) - --------- (316) Net unrealized gain on securities available for sale (net of tax of $1,588) - - - - - - - 2,320 --------- Total comprehensive income - - - - - - - 23,533 --------- Cash dividends declared: 3% Preferred - $3.00 per share - - - - (5) - - (5) 8.48% Preferred - $8.48 per share - - - - (1,491) - - (1,491) Common - $0.48 per share - - - - (5,279) - - (5,279) ----- ------- ---- ------- ------- ------ ----- ------- Balance - December 31, 2001 $ 167 $ 17,585 $ 113 $ 17,195 $112,786 $ 2,176 $ (835) $ 149,187 ====== ========= ====== ======== ======== ======== ======= ========= See accompanying notes to consolidated financial statements.
41
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Dollars in thousands) 2001 2000 1999 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 21,213 $ 18,100 $ 15,957 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,984 3,032 3,585 Provision for loan losses 4,958 4,211 3,062 Deferred income tax benefit (112) (965) (692) Gain on sale and call of securities (531) (27) (71) Gain on sale of loans (1,513) (382) (151) Loss (gain) on sale of other assets 131 (88) (70) Minority interest in net income of subsidiaries 104 90 78 Increase in other assets (1,518) (5,919) (422) Increase (decrease) in accrued expenses and other liabilities (625) 3,735 (2,071) ----------- ---------- ---------- Net cash provided by operating activities 28,091 21,787 19,205 Cash flows from investing activities: Purchase of securities: Available for sale (377,111) (100,150) (110,571) Held to maturity (21,933) (21,124) (20,247) Proceeds from maturity and call of securities: Available for sale 200,315 28,688 55,990 Held to maturity 37,381 25,248 29,563 Proceeds from sale and call of securities 91,412 14,022 4,585 Increase in loans, net (90,362) (124,767) (109,377) Proceeds from sales of premises and equipment 174 41 436 Purchase of premises and equipment, net (4,359) (3,234) (1,332) Payments for purchases of Bath National Corporation and Burke Group, Inc., net of cash acquired (49,072) - - ---------- ----------- ----------- Net cash used in investing activities (213,555) (181,276) (150,953) Cash flows from financing activities: Increase in deposits, net 124,080 128,580 99,076 Increase in short-term borrowings, net 46,497 807 40,734 Proceeds from long-term borrowings 28,912 7,089 1,906 Repayment of long-term borrowings (179) (1,848) (166) Proceeds from guaranteed preferred beneficial interests in corporation's junior subordinated debentures, net of costs 15,713 - - Proceeds from initial public offering, net of costs - - 13,623 Issuance (repurchase) of preferred and common shares, net 11 (425) (54) Dividends paid (6,551) (5,788) (4,988) ---------- ---------- ---------- Net cash provided by financing activities 208,483 128,415 150,131 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 23,019 (31,074) 18,383 Cash and cash equivalents at the beginning of the year 30,152 61,226 42,843 ----------- ----------- ----------- Cash and cash equivalents at the end of the year $ 53,171$ 30,152$ 61,226 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during year for: Interest $ 46,912$ 40,436$ 32,051 Income taxes 10,793 10,821 9,012 Noncash investing and financing activities: Fair value of noncash assets acquired in purchase acquisitions $ 282,534 $ - $ - Fair value of liabilities acquired in purchase acquisitions 271,644 - - Issuance of common stock for acquisition of Burke Group, Inc. 800 - - See accompanying notes to consolidated financial statements.
42 FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Financial Institutions, Inc. ("FII"), a financial holding company organized under the laws of New York State, and subsidiaries (the "Company") provide deposit, lending and other financial services to individuals and businesses in Central and Western New York State. FII and subsidiaries are each subject to regulation by certain federal and state agencies. The consolidated financial statements include the accounts of FII, its five banking subsidiaries, Wyoming County Bank (99.65% owned) ("WCB"), The National Bank of Geneva (99.10% owned) ("NBG"), The Pavilion State Bank (100% owned) ("PSB"), First Tier Bank & Trust (100% owned) ("FTB") and the newly acquired Bath National Bank (100% owned) ("BNB"), collectively referred to as the "Banks". Also included are the accounts of the Burke Group, Inc. (100% owned) ("BGI") and The FI Group, Inc. (100% owned) ("FIGI"), collectively referred to as the "Financial Services Group". BGI is an employee benefits and compensation consulting firm acquired by the Company in October 2001. FIGI is a brokerage subsidiary that commenced operations in March 2000. In February 2001, the Company formed FISI Statutory Trust I ("FISI") (100% owned), to accommodate the private placement of $16.2 million in capital securities, the proceeds of which were utilized to partially fund the acquisition of BNB. The capital securities are identified on the balance sheet as guaranteed preferred beneficial interests in corporation's junior subordinated debentures. The consolidated financial information included herein combines the results of operations, the assets, liabilities and shareholders' equity of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and prevailing practices in the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities, and revenues and expenses for the period. Actual results could differ from those estimates. Amounts in the prior years' consolidated financial statements are reclassified when necessary to conform with the current year's presentation. CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, interest-bearing deposits and federal funds sold are considered cash equivalents. SECURITIES The Company classifies its debt securities as either available for sale or held to maturity. Debt securities which the Company has the ability and positive intent to hold to maturity are carried at amortized cost and classified as held to maturity. Investments in other debt and equity securities are classified as available for sale and are carried at estimated fair value. Unrealized gains or losses related to securities available for sale are included in accumulated other comprehensive income and loss as a component of shareholders' equity, net of the related deferred income tax effect. A decline in the fair value of any security below cost that is deemed other than temporary is charged to income resulting in the establishment of a new cost basis for the security. Interest income includes interest earned on the securities adjusted for amortization of premiums and accretion of discounts on the related securities using the interest method. Realized gains or losses from the sale of available for sale securities are recognized on the trade date using the specific identification method. 43 LOANS Loans are stated at the principal amount outstanding, net of discounts and deferred loan origination fees and costs which are recorded in interest income based on the interest method. Mortgage loans held for sale are stated at the lower of aggregate cost or market value as determined by the current fair value. Interest income on loans is recognized based on loan principal amounts outstanding at applicable interest rates. Accrual of interest on loans is suspended and all unpaid accrued interest is reversed when management believes, after considering collection efforts and the period of time past due, reasonable doubt exists with respect to the collectibility of interest. Income is subsequently recognized to the extent collected, assuming the principal balance is expected to be recovered. The Company services residential mortgage loans for other institutions. Servicing fees are recognized when payments are received. The Company capitalizes servicing assets when servicing rights are retained after selling loans to other institutions. Capitalized servicing assets are reported in other assets and are amortized to noninterest income in proportion to, and over the period of, the estimated future net servicing income. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms, using discounted cash flows and market-based assumptions. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the capitalized asset. Mortgage banking activities consist of fees earned for servicing mortgage loans sold to third parties, gains (or losses) recognized on sales of mortgages, and impairment losses recognized on capitalized mortgage servicing assets. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through charges to income and is maintained at a level which management considers adequate to provide for probable losses inherent in the portfolio. The adequacy of the allowance is determined by management's periodic evaluation of the loan portfolio based on such factors as: current economic conditions; the current financial condition of the borrowers; the economic environment in which they operate; any delinquency in payments; and the value of any collateral held. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require additions to the allowance based on their judgments about information available to them at the time of their examinations. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts of principal and interest under the original terms of the agreement. Accordingly, the Company measures certain impaired commercial and agricultural loans based on the present value of future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company has excluded large groups of small balance, homogeneous loans which include commercial and agricultural loans less than $250,000, all residential mortgages, home equity and consumer loans that are collectively evaluated for impairment. FEDERAL HOME LOAN BANK (FHLB) STOCK As a member of the FHLB system, the Company is required to maintain a specified investment in FHLB stock. This non-marketable investment, which is carried at cost, must be at an amount at least equal to the greater of 5% of the outstanding advance balance or 1% of the aggregate outstanding residential mortgage loans held by the Company. Included in other assets is FHLB stock totaling $5.8 million and $4.0 million, at December 31, 2001 and 2000, respectively. 44 PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using straight-line and accelerated methods over estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of lease terms or the useful lives of the assets. GOODWILL AND OTHER INTANGIBLE ASSETS Deposit premiums and goodwill are being amortized on the straight-line method, over the expected periods to be benefited, which generally range between 5 and 20 years. Intangible assets are periodically reviewed for impairment or when events or changed circumstances may affect the underlying basis of the assets. Statement of Financial Accounting Standards (SFAS) No. 142 requires that goodwill (including goodwill reported in prior acquisitions) no longer be amortized to earnings, but instead be reviewed for impairment annually, with impairment losses charged to earnings when they occur. The Company was required to adopt SFAS No. 142 effective January 1, 2002. Therefore, in accordance with SFAS No. 142, the Company ceased goodwill amortization on January 1, 2002 and will evaluate goodwill for impairment annually. STOCK COMPENSATION The Company uses a fixed award stock option plan to compensate certain key members of management of the Company and its subsidiaries. The Company accounts for issuance of stock options under the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25, compensation expense is recorded on the date the options are granted only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed under SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above and has adopted only the disclosure requirements of SFAS No. 123. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period which includes the enactment date. 45 EARNINGS PER COMMON SHARE Basic earnings per share, after giving effect to preferred stock dividends, has been computed using weighted average common shares outstanding. Diluted earnings per share reflects the effects, if any, of incremental common shares issuable upon exercise of dilutive stock options. Earnings per common share have been computed based on the following:
Years Ended December 31 (Dollars and shares in thousands) 2001 2000 1999 --------- --------- --------- Net income $ 21,213 $ 18,100 $ 15,957 Less: Preferred stock dividends 1,496 1,496 1,503 --------- --------- --------- Net income available to common shareholders $ 19,717 $ 16,604 $ 14,454 ========= ========= ========= Average number of common shares outstanding used to calculate basic earnings per common share 10,994 10,995 10,474 Add: Effect of dilutive options 132 1 - --------- --------- --------- Average number of common shares used to calculate diluted earnings per common share 11,126 10,996 10,474 ========= ========= =========
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company's financial instruments with off-balance sheet risk are commercial letters of credit and mortgage, commercial and credit card loan commitments. These financial instruments are reflected in the statement of financial condition upon funding. Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," requires recognition of 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. The Company adopted SFAS No. 133 on January 1, 2001, but did not utilize derivatives in 2001. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. FINANCIAL SERVICES GROUP FEES AND COMMISSIONS Financial services group fees and commissions consist of commissions from sales of investment products and services to customers, fees and commissions from trust services provided to customers, and fees and commissions earned from design, consulting, administrative and actuarial services provided to employee benefits plans and their sponsors. Fees and commissions are recognized when earned. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued SFAS Nos. 141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method, use of the pooling-of-interests method is no longer permitted for business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill (including goodwill reported in prior acquisitions) no longer be amortized to earnings, but instead be reviewed for impairment annually, with impairment losses charged to earnings when they occur. The Company was required to adopt SFAS No. 142 effective January 1, 2002. The results of operations for year ended December 31, 2001 include goodwill amortization from the BNB acquisition of $1,653,000. The amortization of goodwill ceased effective January 1, 2002. 46 (2) MERGERS AND ACQUISITIONS On May 1, 2001, FII acquired all of the common stock of Bath National Corporation ("BNC") , and its wholly-owned subsidiary bank, Bath National Bank. BNB is a full service community bank headquartered in Bath, New York, which has 9 branch locations in Steuben, Yates, Ontario and Schuyler Counties. The Company paid $48.00 per share in cash for each of the outstanding shares of BNC common stock with an aggregate purchase price of approximately $62.6 million. The acquisition was accounted for under the purchase method of accounting, and accordingly, the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, has been recorded as goodwill. Goodwill recognized with respect to the merger was approximately $37.2 million. Goodwill was amortized in 2001 using the straight-line method over 15 years, since the transaction was consummated prior to June 30, 2001, the effective date of SFAS No. 142. However, in accordance with SFAS No. 142, the Company ceased goodwill amortization on January 1, 2002 and will evaluate goodwill for impairment annually. The results of operations for BNB are included in the income statement from the date of acquisition (May 1, 2001) to the end of the period. On October 22, 2001, the Company acquired the Burke Group, Inc. ("BGI"), an employee benefits administration and compensation consulting firm, with offices in Honeoye Falls and Syracuse, New York. BGI's expertise includes design and consulting for retirement and employee welfare plans, administrative services for defined contribution and benefit plans, actuarial services and post employment benefits. Under the terms of the agreement, BGI shareholders received primarily common stock as consideration for their ownership in BGI. The acquisition was accounted for under the purchase method of accounting, and accordingly, the excess of the purchase price over the fair value of identifiable assets acquired, less liabilities assumed, has been recorded as goodwill, after recognizing an intangible asset separate from goodwill in accordance with SFAS No. 141. Goodwill recognized with respect to the merger was approximately $1.3 million. In accordance with SFAS No. 142, the Company is not required to amortize goodwill on this acquisition, but evaluates goodwill for impairment on an annual basis. The Company also recorded a $500,000 intangible asset which is being amortized using the straight-line method over five years. The results of operations for BGI are included in the income statement from the date of acquisition (October 22, 2001) to the end of the period. Goodwill from 2001 acquisitions amounted to $36.8 million as of December 31, 2001. Other intangible assets totaled $2.4 million as of December 31, 2001 and 2000. Goodwill amortization included in the results of operations for the year ended December 31, 2001 amounted to $1.7 million. Annualized goodwill amortization for 2001 was $2.5 million. Amortization of other intangible assets was $728,000 and $737,000 for the years ended December 31, 2001 and 2000, respectively. 47 The following table presents certain unaudited pro forma information as if the BNC and BGI acquisitions, which occurred in 2001, had been consummated on January 1, 2000. This proforma information gives effect to certain adjustments, including accounting adjustments related to fair value adjustments, amortization of goodwill and related income tax effects. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company acquired BNC and BGI on January 1, 2000.
Pro Forma Pro Forma (Unaudited) (Unaudited) Year Ended Year Ended (Dollars in thousands, except per share) December 31, 2001 December 31, 2000 ----------------- ----------------- Net interest income $67,918 $62,097 Provision for loan losses 5,371 9,464 Noninterest income 19,745 14,470 Net income $19,627 $13,806 ======== ======= Earnings per share: Basic $1.65 $1.12 Diluted $1.63 $1.12
On January 11, 2002, FII reached a definitive agreement to acquire all of the outstanding stock of the Bank of Avoca ("BOA"). BOA is a retail oriented institution with its main office located in Avoca, New York, as well as, a branch located in Cohocton, New York. Total assets of BOA approximated $17.9 million as of December 31, 2001. FII will fund the transaction using $1.5 million in FII stock, based on the average sales price of FII stock for the 30 trading days immediately prior to the closing date. The acquisition, which is subject to approval by BOA shareholders and by various regulatory agencies, will be accounted for using the purchase method of accounting and is currently scheduled to be completed in the second quarter of 2002. Subsequently, BOA will merge with and into BNB. 48 (3) SECURITIES The aggregate amortized cost and fair value of securities available for sale and securities held to maturity follow:
December 31, 2001 --------------------------------------------------------- Amortized Gross Unrealized Fair ------------------------------ (Dollars in thousands) Cost Gains Losses Value ----------- ----------- ---------- ----------- Securities Available for Sale: U.S. Treasury and agency $ 182,812 $ 1,949 $ 1,268 $ 183,493 Mortgage-backed securities 89,396 1,014 416 89,994 State and municipal obligations 141,637 2,220 635 143,222 Corporate bonds 7,824 121 35 7,910 Equity securities 3,082 722 - 3,804 ----------- ----------- ---------- ----------- Total securities available for sale $ 424,751 $ 6,026 $ 2,354 $ 428,423 =========== =========== ========== =========== Securities Held to Maturity: U.S. Treasury and agency $ 1,950 $ 68 $ - $ 2,018 State and municipal obligations 59,331 981 13 60,299 ----------- ----------- ---------- ----------- Total securities held to maturity $ 61,281 $ 1,049 $ 13 $ 62,317 =========== =========== ========== =========== December 31, 2000 --------------------------------------------------------- Amortized Gross Unrealized Fair ------------------------------ (Dollars in thousands) Cost Gains Losses Value ----------- ----------- ---------- ----------- Securities Available for Sale: U.S. Treasury and agency $ 170,127 $ 606 $ 1,516 $ 169,217 Mortgage-backed securities 29,019 237 117 29,139 State and municipal obligations 48,512 459 65 48,906 Corporate bonds 9,714 16 384 9,346 Equity securities 695 520 - 1,215 ----------- ----------- ---------- ----------- Total securities available for sale $ 258,067 $ 1,838 $ 2,082 $ 257,823 =========== =========== ========== =========== Securities Held to Maturity: U.S. Treasury and agency $ 1,950 $ 11 $ - $ 1,961 State and municipal obligations 74,997 253 327 74,923 ----------- ----------- ---------- ----------- Total securities held to maturity $ 76,947 $ 264 $ 327 $ 76,884 =========== =========== ========== =========== The amortized cost and fair value of debt securities by contractual maturity are as follows: December 31, 2001 --------------------------------------------------- Available for Sale Held to Maturity -------------------------- -------------------------- Amortized Fair Amortized Fair (Dollars in thousands) Cost Value Cost Value ----------- ----------- ---------- ----------- Due in one year or less $ 27,386 $ 27,777 $ 31,036 $ 31,275 Due in one to five years 151,484 154,056 27,438 28,211 Due in five to ten years 185,476 185,180 2,162 2,192 Due after ten years 57,323 57,606 645 639 ----------- ----------- ---------- ----------- $ 421,669 $ 424,619 $ 61,281 $ 62,317 =========== =========== ========== ===========
Maturities of mortgage-backed securities are classified in accordance with the contractual repayment schedules. Expected maturities will differ from contracted maturities since issuers generally have the right to prepay obligations. 49 Proceeds from the sale and call of securities during 2001 were $91,412,000; realized gross gains were $617,000 and gross losses were $86,000. Proceeds from the sale and call of securities available for sale during 2000 were $14,022,000; realized gross gains were $52,000 and gross losses were $25,000. Proceeds from the sale and call of securities available for sale during 1999 were $4,585,000; realized gross gains were $126,000 and gross losses were $55,000. Gains and losses were computed using the specific identification method. There were no transfers between held to maturity and available for sale securities in 2001, 2000 or 1999. Securities held to maturity and available for sale with carrying values of $340,989,000 and $285,559,000 were pledged as collateral for municipal deposits and repurchase agreements at December 31, 2001 and 2000, respectively. (4) LOANS Loans outstanding at December 31, 2001 and 2000 are summarized as follows: (Dollars in thousands) 2001 2000 -------------- ----------- Commercial $ 232,379 $ 169,832 Commercial real estate 274,702 166,041 Agricultural 186,623 165,367 Residential real estate 240,141 201,160 Consumer and home equity 232,205 184,745 -------------- ----------- Loans, gross 1,166,050 887,145 Allowance for loan losses (19,074) (13,883) -------------- ----------- Loans, net $ 1,146,976 $ 873,262 ============== =========== The following table sets forth the changes in the allowance for loan losses for the years indicated. Years ended December 31 (Dollars in thousands) 2001 2000 1999 ----------- ----------- ----------- Balance at beginning of year $ 13,883 $ 11,421 $ 9,570 Allowance obtained through BNB acquisition 2,686 - - Charge-offs: Commercial 1,003 466 312 Commercial real estate 394 629 139 Agricultural 58 85 12 Residential real estate 178 113 461 Consumer and home equity 1,319 905 663 ----------- ----------- ----------- Total charge-offs 2,952 2,198 1,587 Recoveries: Commercial 58 206 88 Commercial real estate 23 22 23 Agricultural - 1 - Residential real estate 19 5 163 Consumer and home equity 399 215 102 ----------- ----------- ----------- Total recoveries 499 449 376 ----------- ----------- ----------- Net charge-offs 2,453 1,749 1,211 Provision for loan losses 4,958 4,211 3,062 ----------- ----------- ----------- Balance at end of year $ 19,074 $ 13,883 $ 11,421 =========== =========== =========== 50 The following table sets forth information regarding nonaccruing loans and other nonperforming assets at December 31, 2001 and 2000: (Dollars in thousands) 2001 2000 -------------- ------------- Nonaccruing loans $ 8,958 $ 6,596 Accruing loans 90 days or more delinquent 1,064 521 -------------- ------------- Total nonperforming loans 10,022 7,117 Other real estate owned 947 932 -------------- ------------- Total nonperforming assets $ 10,969 $ 8,049 ============== ============= The recorded investment in loans that are considered to be impaired totaled $8,289,000 and $6,113,000 at December 31, 2001 and 2000, respectively. The allowance for loan losses related to impaired loans amounted to $1,778,000, at December 31, 2001 and $1,140,000 at December 31, 2000. The average recorded investment in impaired loans during 2001, 2000 and 1999 was $7,561,000, $5,329,000 and $3,838,000, respectively. Interest income recognized on impaired loans, while such loans were impaired, during 2001, 2000 and 1999 was approximately $392,000, $312,000 and $82,000, respectively. In the normal course of business there are various outstanding commitments to extend credit which are not reflected in the accompanying consolidated financial statements. Loan commitments have off-balance-sheet credit risk until commitments are fulfilled or expire. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are ultimately advanced in full and that the collateral or other security is of no value. The Company's policy generally requires customers to provide collateral, usually in the form of customers' operating assets or property, prior to the disbursement of approved loans. At December 31, 2001, letters of credit totaling $8,602,000 and unused loan commitments and lines of credit of $265,933,000 were contractually available. Comparable amounts for these commitments at December 31, 2000 were $7,018,000 and $182,491,000, respectively. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without funding, the total commitment amounts do not necessarily represent future cash requirements. Loans outstanding to certain officers, directors, or companies in which they have 10% or more beneficial ownership, approximated $25,592,000 and $23,988,000 at December 31, 2001 and 2000, respectively. These loans were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as comparable transactions with other customers, and do not involve more than a normal risk of collectibility. As of December 31, 2001, the Company had no significant concentration of credit risk in the loan portfolio outside of normal geographic concentration pertaining to the communities that the Company serves. There is no significant exposure to highly leveraged transactions and there are no foreign credits in the loan portfolio. 51 Loans serviced for others amounting to $302,258,000 and $205,218,000 at December 31, 2001 and 2000, respectively, are not included in the consolidated statements of financial condition. The Company had capitalized mortgage servicing rights related to servicing these loans of $889,000 and $285,000 as of December 31, 2001 and 2000, respectively. Loans held for sale totaled $10,557,000 and $3,280,000 at December 31, 2001 and 2000, respectively. Proceeds from the sale of loans were $117,446,000, $25,880,000 and $53,552,000 in 2001, 2000 and 1999, respectively. Net gain on the sale of loans was $1,513,000, $382,000 and $151,000 in 2001, 2000 and 1999, respectively. Commitments to sell loans were $5,828,000 and $847,000 at December 31, 2001 and 2000, respectively. The Company enters into forward contracts for future delivery of residential mortgage loans at a specified yield to reduce the interest rate risk associated with fixed rate residential mortgage loans held for sale and commitments to fund residential mortgages. Credit risk arises from the possible inability of the other parties to comply with the contract terms. Substantially all of the Company's contracts are with government-sponsored enterprises or government agencies (FHLMC and FHA). (5) PREMISES AND EQUIPMENT A summary of premises and equipment at December 31, 2001 and 2000 follows: (Dollars in thousands) 2001 2000 -------------- ----------- Land and land improvements $ 2,584 $ 1,975 Buildings and leasehold improvements 21,599 17,034 Furniture, fixtures, equipment and vehicles 16,967 13,488 -------------- ----------- Premises and equipment, gross 41,150 32,497 Accumulated depreciation and amortization (16,683) (14,074) -------------- ----------- Premises and equipment, net $ 24,467 $ 18,423 ============== =========== Depreciation expense amounted to $2,403,000, $1,866,000 and $2,036,000 for the years ended December 31, 2001, 2000 and 1999, respectively. (6) DEPOSITS Scheduled maturities for certificates of deposit at December 31, 2001 are as follows: Mature in year ending December 31, (Dollars in thousands) 2002 $ 527,735 2003 71,404 2004 12,683 2005 20,641 2006 3,963 Thereafter 41 ------------- $ 636,467 Certificates of deposit greater than $100,000 totaled $234,450,000 and $293,834,000 at December 31, 2001 and 2000 respectively. Interest expense on certificates of deposit greater than $100,000 amounted to $15,899,000, $15,962,000, and $9,895,000 for the years ended December 31, 2001, 2000 and 1999, respectively. 52 (7) BORROWINGS Short-term borrowings at December 31, 2001 and 2000 are summarized as follows: (Dollars in thousands) 2001 2000 -------------- ----------- Federal funds purchased and securities sold under repurchase agreements $ 60,957 $ 15,950 FHLB advances 42,135 30,953 Other 678 - -------------- ----------- Total short-term borrowings $ 103,770 $ 46,903 ============== =========== Average rate at year-end 2.12% 5.75% =============== ============ Average rate during period 3.95% 5.96% =============== ============ The FHLB advances mature in less than one year and carry rates of interest from 1.91% to 5.11%. Advances payable to the FHLB are collateralized by $5.8 million of FHLB stock and mortgage loans with a carrying value of $157.6 million at December 31, 2001. At December 31, 2001, the Company had remaining credit available of $40.5 million under lines of credit with the FHLB. The Company also had $41.0 million of remaining credit available under unsecured lines of credit with various banks at December 31, 2001. During 2001, the Company also obtained lines of credit with Farmer Mac permitting borrowings to a maximum of $50.0 million. However, no advances were outstanding against those lines at December 31, 2001 Short-term FHLB advances as of and for the years ended December 31, 2001, 2000 and 1999 are summarized as follows: (Dollars in thousands) 2001 2000 1999 ------- ------ ------- Weighted average interest rate at year-end 2.49% 6.52% 5.89% Maximum outstanding at any month-end $ 42,135 $ 60,347 $ 41,500 Average amount outstanding during the year $ 28,551 $ 40,797 $ 7,553 The average amounts outstanding are computed using daily average balances. Related interest expense for 2001, 2000 and 1999 was $1,346,000, $2,643,000 and $418,000, respectively. Federal funds purchased and securities sold under repurchase agreements as of and for the years ended December 31, 2001, 2000 and 1999 are summarized as follows: (Dollars in thousands) 2001 2000 1999 ------- ------ ------- Weighted average interest rate at year-end 1.88% 4.26% 4.73% Maximum outstanding at any month-end $ 65,474 $ 26,135 $ 9,802 Average amount outstanding during the year $ 33,157 $ 7,939 $ 8,762 The average amounts outstanding are computed using daily average balances. Related interest expense for 2001, 2000 and 1999 was $1,108,000, $400,000 and $402,000, respectively. 53 At December 31, 2001 and 2000, long-term borrowings primarily include FHLB advances with maturities of more than 1 year. The advances mature on various dates ranging from 2001 through 2011 and bear interest at a fixed weighted average rate of 5.05% as of December 31, 2001. The Company's FHLB advances include $20.0 million in fixed-rate callable borrowings, which can be called by the FHLB on the first anniversary of the borrowing, and quarterly thereafter. Other long-term borrowings consist primarily of a $5.0 million advance on a credit agreement with a bank, which was executed to aid in funding the acquisition of BNB. The credit agreement requires monthly payments of interest only, at a variable interest rate of 1.50% plus LIBOR, with 5.02% being the rate in effect at December 31, 2001. The credit agreement expires April 2003. The aggregate maturities of long-term borrowings at December 31, 2001 are as follows: Mature in year ending December 31, (Dollars in thousands) 2003 $ 10,360 2004 18,177 2005 9,679 2006 1,183 2007 1,183 Thereafter 29,837 ------------- $ 70,419 The weighted average interest rate on long-term borrowings at December 31, 2001 and 2000 was 5.06% and 6.41%, respectively. Related interest expense for 2001, 2000 and 1999 was $2,386,000, $804,000 and $643,000, respectively. (8) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATIONS JUNIOR SUBORDINATED DEBENTURES On February 22, 2001, the Company established FISI Statutory Trust I (the "Trust"), which is a statutory business trust formed under Connecticut law, upon filing a certificate of trust with the Connecticut Secretary of State. The Trust exists for the exclusive purposes of (i) issuing and selling 30 year guaranteed preferred beneficial interests in the Corporation's junior subordinated debentures ("capital securities") in the aggregate amount of $16.2 million at a fixed rate of 10.20%, (ii) using the proceeds from the sale of the capital securities to acquire the junior subordinated debentures issued by the Company and (iii) engaging in only those other activities necessary, advisable or incidental thereto. The junior subordinated debentures are the sole assets of the Trust and, accordingly, payments under the corporation obligated junior debentures are the sole revenue of the Trust. All of the common securities of the Trust are owned by the Company. The Company used the net proceeds from the sale of the capital securities to partially fund the BNB acquisition. As of December 31, 2001, all but $3.8 million of the capital securities qualify as Tier I capital under regulatory definitions. The Company's primary source of funds to pay interest on the debentures owed to the Trust are current dividends from its subsidiary banks. Accordingly, the Company's ability to service the debentures is dependent upon the continued ability of the subsidiary banks to pay dividends to the Company. Since the capital securities are classified as debt for financial statement purposes, the tax-deductible expense associated with the capital securities is recorded as interest expense in the consolidated statements of income. The Company incurred $487,000 in costs to issue the securities and the costs are being amortized over 20 years using the straight-line method. 54 (9) INCOME TAXES Total income taxes for the years ended December 31, 2001, 2000 and 1999 were allocated as follows:
(Dollars in thousands) 2001 2000 1999 ----------- ----------- ----------- Income from operations $ 11,033 $ 9,804 $ 8,813 Shareholders' equity, for unrealized gain (loss) on securities available for sale 1,588 1,746 (2,637) ----------- ----------- ----------- $ 12,621 $ 11,550 $ 6,176 =========== =========== ===========
Income tax expense (benefit) attributable to operations for the years ended December 31, 2001, 2000 and 1999 consists of:
(Dollars in thousands) 2001 2000 1999 ----------- ----------- ----------- Current: Federal $ 8,676 $ 8,380 $ 7,449 State 2,469 2,389 2,056 ----------- ----------- ----------- Total current 11,145 10,769 9,505 Deferred: Federal (68) (785) (657) State (44) (180) (35) ----------- ----------- ----------- Total deferred (112) (965) (692) ----------- ----------- ----------- Total income taxes $ 11,033 $ 9,804 $ 8,813 =========== =========== ===========
A reconciliation of the actual and statutory tax rates applicable to income from operations for the years ended December 31, 2001, 2000 and 1999 differ as follows:
2001 2000 1999 ----------- ----------- ----------- Statutory rate 35.0% 35.0% 35.0% Increase (decrease) resulting from: Tax exempt interest income (8.1) (6.0) (5.6) State taxes, net of federal income tax benefit 4.9 5.1 5.3 Goodwill amortization 1.8 - 0.2 Other 0.6 1.0 0.7 ------- --------- -------- Total 34.2% 35.1% 35.6%
55 The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented as follows:
(Dollars in thousands) 2001 2000 ------------- ------------- Deferred tax assets: Allowance for loan losses $ 7,165 $ 5,437 Unrealized loss on securities available for sale - 100 Core deposit intangible 773 603 Interest on nonaccrual loans 750 536 Other 395 209 ------------- ------------- Total gross deferred tax assets 9,083 6,885 Deferred tax liabilities: Prepaid pension costs 1,150 1,504 Unrealized gain on securities available for sale 1,488 - Depreciation of premises and equipment 693 447 Loan servicing assets 354 114 Other 476 239 ------------- ------------- Total gross deferred tax liabilities 4,161 2,304 ------------- ------------- Net deferred tax asset, at year-end (included in other assets) $ 4,922 $ 4,581 ============= ============= Net deferred tax asset, at beginning of year 4,581 5,362 ------------- ------------- (Increase) decrease in net deferred tax asset (341) 781 Net deferred tax asset acquired 1,470 - Initial purchase accounting adjustments, net 347 - Change in unrealized gain/loss on securities available for sale (1,588) (1,746) ------------- ------------- Deferred tax benefit $ (112) $ (965) ============= =============
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carry-back period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income and projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based on its assessment, management determined that no valuation allowance is necessary at December 31, 2001 and 2000. 56 (10) LEASE COMMITMENTS At December 31, 2001, the Company was obligated under a number of noncancellable operating leases for land, buildings and equipment. Certain of these leases provide for escalation clauses and contain renewal options calling for increased rentals if the lease is renewed. Future minimum lease payments on operating leases at December 31, 2001 were as follows: Operating lease payments in year ending December 31, (Dollars in thousands) 2002 $ 434 2003 397 2004 368 2005 329 2006 271 Thereafter 837 ------------- $ 2,636 (11) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS DEFINED BENEFIT PLAN The Company has a defined benefit pension plan covering substantially all employees. The benefits are based on years of service and the employee's highest average compensation during five consecutive years of employment. The Company's funding policy is to contribute annually an actuarially determined amount to cover current service cost plus amortization of prior service costs. The following table sets forth the defined benefit pension plan's change in benefit obligation and change in plan assets for 2001, 2000 and 1999 using the most recent actuarial data measured at September 30, 2001, 2000 and 1999:
(Dollars in thousands) 2001 2000 1999 ----------- ----------- ----------- Change in benefit obligation: Benefit obligation at beginning of year $ (12,114) $ (11,740) $ (10,947) Service cost (850) (766) (673) Additional prior service cost (399) - - Interest cost (890) (806) (698) Actuarial gain (loss) 72 603 17 Benefits paid 470 476 459 Plan expenses 103 119 102 ----------- ----------- ----------- Benefit obligation at end of year (13,608) (12,114) (11,740) Change in plan assets: Fair value of plan assets at beginning of year 17,180 15,706 13,509 Actual (loss) return on plan assets (1,367) 1,588 2,111 Employer contribution - 481 647 Benefits paid (470) (476) (459) Plan expenses (103) (119) (102) ----------- ----------- ----------- Fair value of plan assets at end of year 15,240 17,180 15,706 ----------- ----------- ----------- Funded status 1,632 5,066 3,966 Unamortized net asset at transition (179) (217) (255) Unrecognized net (gain) loss subsequent to transition 1,292 (1,433) (552) Unamortized prior service cost 345 (57) (59) ----------- ----------- ----------- Prepaid benefit cost, included in other assets $ 3,090 $ 3,359 $ 3,100 =========== =========== ===========
57 Pension expense consists of the following components for the years ended December 31, 2001, 2000 and 1999:
(Dollars in thousands) 2001 2000 1999 ----------- ----------- ----------- Service cost $ 850 $ 766 $ 673 Interest cost on projected benefit obligation 890 806 698 Expected return on plan assets (1,429) (1,307) (1,121) Amortization of net transition asset (38) (38) (38) Amortization of unrecognized prior service cost (3) (3) (3) ----------- ----------- ----------- Net periodic pension expense $ 270 $ 224 $ 209 =========== =========== =========== Weighted average discount rate 7.50% 7.00% 7.00% ========== =========== ========== Expected long-term rate of return 8.50% 8.50% 8.50% ========== =========== ========== Rate of compensation increase 5.00% 5.00% 5.00% ========== =========== ==========
DEFINED CONTRIBUTION PLAN The Company also sponsors a defined contribution profit sharing (401(k)) plan covering substantially all employees. The Company matches certain percentages of each eligible employee's contribution to the plan. Expense for the plan amounted to $708,000, $524,000 and $480,000, in 2001, 2000 and 1999, respectively. POSTRETIREMENT BENEFITS Prior to December 31, 2000, BNB provided health and dental care benefits to retired employees who met specified age and service requirements through a postretirement health and dental care plan in which both BNB and the retiree shared the cost. The plan provided for substantially the same medical insurance coverage as for active employees until their death and was integrated with Medicare for those retirees aged 65 or older. In 2000, the plan's eligibility requirements were amended to curtail eligible benefit payments to only retired employees and active participants who were fully vested under the Plan. The accrued liability related to this plan amounted to $741,000 as of December 31, 2001. Expense for the plan amounted to $80,000 in 2001. (12) STOCK COMPENSATION PLANS The Company has a Management Stock Incentive Plan and a Directors' Stock Incentive Plan. Under the plans, the Company may grant stock options to its directors, directors of its subsidiaries, and key employees to purchase shares of common stock, shares of restricted stock and stock appreciation rights. Grants under the plans may be made to up to 10% of the number of shares of common stock issued, including treasury shares. The exercise price of each option equals the market price of the Company's stock on the date of the grant. The maximum term of each option is ten years and the options' generally vest between three and five years. The Company applies APB Opinion 25 and related Interpretations in accounting for the stock option plans. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's stock incentive plans been determined based on the fair value at the grant dates for awards under the plans consistent with the method prescribed by SFAS No. 123, the Company's net income and earnings per share would have been adjusted to the following pro forma amounts: 58
(Dollars in thousands, except per share) For the years ended December 31 ------------------------------------------ 2001 2000 1999 ------------- ------------- ------------ Net income As reported $ 21,213 $ 18,100 $ 15,957 Pro forma 20,925 17,898 15,868 Earnings per share (basic) As reported $ 1.79 $ 1.51 $ 1.38 Pro forma 1.77 1.49 1.37 Earnings per share (diluted) As reported $ 1.77 $ 1.51 $ 1.38 Pro forma 1.75 1.49 1.37
The weighted-average fair value of options granted during the years ended December 31, 2001, 2000, and 1999 amounted to $5.53, $3.72 and $4.49, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: For the years ended December 31
------------------------------------------ 2001 2000 1999 ------------- ------------- ------------ Dividend yield 2.43% 2.98% 2.16% Expected life (in years) 10.00 10.00 10.00 Expected volatility 20.00% 20.00% 20.00% Risk-free interest rate 4.99% 6.17% 6.00%
The activity in the FII stock option plans is summarized below:
Weighted Stock Average Options Exercise Outstanding Price ------------------ ------------- Balance December 31, 1998 $ - $ - Granted 319,042 14.00 ----------- --------- Balance December 31, 1999 319,042 14.00 Granted 70,638 13.45 Cancelled (5,162) (13.56) ----------- ---------- Balance December 31, 2000 384,518 13.90 Granted 115,637 18.94 Cancelled (3,474) (13.28) ----------- ---------- Balance December 31, 2001 $496,681 $15.08 ======== ====== Exercisable at: December 31, 2001 $153,826 $13.92 December 31, 2000 65,986 14.00 December 31, 1999 - -
A summary of stock options at December 31, 2001 follows:
Outstanding Exercisable -------------------------------------- ------------------------ Weighted Weighted Weighted Number Average Average Number Average Range of of Stock Exercise Life of Stock Exercise Exercise Price Options Price (in years) Options Price ----------------------- ------------- ----------- ----------- --------- ----------- $11.75 to $14.00 425,928 $ 13.93 7.8 153,826 $ 13.92 $21.35 to $22.99 71,383 21.95 9.5 - -
59 (13) REGULATORY CAPITAL The Company is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material impact on the Company's financial statements. For evaluating regulatory capital adequacy, companies are required to determine capital and assets under regulatory accounting practices. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios. The leverage ratio requirement is based on period-end capital to average total assets during the previous three months. Compliance with risk based capital requirements is determined by dividing regulatory capital by the sum of a company's weighted asset values. Risk weightings are established by the regulators for each asset category according to the perceived degree of risk. As of December 31, 2001 and 2000, the Company and each subsidiary bank met all capital adequacy requirements to which they are subject. As of December 31, 2001, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company and its subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company's category. Payments of dividends by the subsidiary banks to FII are limited or restricted in certain circumstances under banking regulations. At December 31, 2001, an aggregate of $6,572,000 was available for payment of dividends by the subsidiary banks to FII without the approval from the appropriate regulatory authorities.
December 31, 2001 ---------------------------------------------------------------------------- Actual Regulatory Capital Minimum Requirements Well-Capitalized ------------------------ -------------------- -- ---------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Leverage capital (Tier 1) as percent of three-month average assets: Company $ 120,638 7.02% $ 68,721 4.00% $ 85,902 5.00% BNB 27,428 8.43 13,008 4.00 16,260 5.00 FTB 8,951 6.08 5,893 4.00 7,366 5.00 NBG 37,415 6.96 21,506 4.00 26,883 5.00 PSB 12,154 7.02 6,922 4.00 8,652 5.00 WCB 35,437 6.56 21,538 4.00 26,922 5.00 As percent of risk-weighted, period-end assets: Core capital (Tier 1): Company 120,638 9.81 49,192 4.00 73,789 6.00 BNB 27,428 14.18 7,741 4.00 11,611 6.00 FTB 8,951 8.94 4,003 4.00 6,005 6.00 NBG 37,415 9.24 16,191 4.00 24,287 6.00 PSB 12,154 9.14 5,318 4.00 7,978 6.00 WCB 35,347 8.95 15,792 4.00 23,688 6.00 Total capital (Tiers 1 and 2): Company 139,847 11.37 98,385 8.00 122,981 10.00 BNB 29,851 15.43 15,481 8.00 19,352 10.00 FTB 10,206 10.20 8,006 8.00 10,008 10.00 NBG 42,487 10.50 32,382 8.00 40,478 10.00 PSB 13,822 10.40 10,637 8.00 13,296 10.00 WCB 40,301 10.21 31,585 8.00 39,481 10.00
60
December 31, 2000 ---------------------------------------------------------------------------- Actual Regulatory Capital Minimum Requirements Well-Capitalized (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Leverage capital (Tier 1) as percent of three-month average assets: Company $ 129,839 10.19% $ 50,946 4.00% $ 63,683 5.00% FTB 7,832 5.93 5,279 4.00 6,599 5.00 NBG 38,222 8.02 19,067 4.00 23,384 5.00 PSB 10,854 6.46 6,718 4.00 8,397 5.00 WCB 30,813 6.19 19,918 4.00 24,897 5.00 As percent of risk-weighted, period-end assets: Core capital (Tier 1): Company 129,839 14.02 37,052 4.00 55,577 6.00 FTB 7,832 9.19 3,410 4.00 5,114 6.00 NBG 38,222 10.32 14,820 4.00 22,230 6.00 PSB 10,854 8.91 4,873 4.00 7,309 6.00 WCB 30,813 8.93 13,805 4.00 20,708 6.00 Total capital (Tiers 1 and 2): Company 141,446 15.27 74,103 8.00 92,629 10.00 FTB 8,900 10.44 6,819 8.00 8,524 10.00 NBG 42,859 11.57 29,640 8.00 37,050 10.00 PSB 12,381 10.16 9,745 8.00 12,182 10.00 WCB 35,143 10.18 27,610 8.00 34,513 10.00
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS The "fair value" of a financial instrument is defined as the price a willing buyer and a willing seller would exchange in other than a distressed sale situation. The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2001 and 2000:
2001 2000 --------------------------- ---------------------------- Carrying Fair Carrying Fair (Dollars in thousands) Amount Value Amount Value ---------- ----------- ------ ---------- Financial Assets Cash and cash equivalents $ 53,171 $ 53,171 $ 30,152 $ 30,152 Securities 489,704 490,740 334,770 334,707 FHLB and FRB stock 7,732 7,732 4,046 4,046 Loans, net 1,146,976 1,174,381 873,262 897,977 Financial Liabilities Deposits: Interest Bearing: Savings and interest bearing demand 572,563 572,563 309,732 309,732 Time deposits 636,467 635,425 605,539 606,113 Non-interest bearing 224,628 224,628 162,840 162,840 ----------- ----------- ----------- ------------ Total deposits 1,433,658 1,432,616 1,078,111 1,078,685 Borrowings: Short-term 103,770 103,770 46,903 46,903 Long-term 70,419 74,042 15,481 15,382 Guaranteed preferred beneficial interests in corporation's junior subordinated debentures 16,200 17,596 - -
61 The following methods and assumptions were used to estimate the fair value of each class of financial instruments. Cash and cash equivalents: The carrying amounts reported in the consolidated statements of financial condition for cash, due from banks, interest-bearing deposits and Federal funds sold approximate the fair value of those assets. Securities: Fair value is based on quoted market prices, where available. Where quoted market prices are not available, fair value is based on quoted market prices of comparable instruments. FHLB and FRB stock: The carrying amounts reported in the consolidated statements of financial condition for FHLB and FRB stock approximate the fair value of those assets. Loans: For variable rate loans that reprice frequently, fair value approximates carrying amount. The fair value for fixed rate loans is estimated through discounted cash flow analysis using interest rates currently being offered for loans with similar terms and credit quality. The fair value of loans held for sale is based on quoted market prices and investor commitments. For nonperforming loans, fair value is estimated by discounting expected cash flows at a rate commensurate with the risk associated with the estimated cash flows. Deposits: The fair value for savings, money market and non-interest bearing accounts is equal to the carrying amount because of the customer's ability to withdraw funds immediately. The fair value of time deposits is estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. Borrowings: Carrying value approximates fair value for short-term borrowings. The fair value for long-term borrowings is estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures: The fair value for guaranteed preferred beneficial interests in corporation's junior subordinated debentures is estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. 62 (15) SEGMENT INFORMATION Reportable segments are comprised of WCB, NBG, BNB, PSB and FTB as the Company evaluates performance on an individual bank basis. The reportable segment information as of and for the years ended December 31, 2001, 2000 and 1999 follows:
(Dollars in thousands) 2001 2000 1999 -------------- -------------- --------------- Net interest income WCB $ 23,306 $ 21,505 $ 19,332 NBG 20,279 18,230 16,154 BNB 8,184 - - PSB 8,186 7,203 6,384 FTB 6,041 5,173 4,721 ---------- ----------- --------- Total segment net interest income 65,996 52,111 46,591 Parent, non-bank subsidiaries and eliminations, net (1,222) 751 218 ---------- ----------- --------- Total net interest income $ 64,774 $ 52,862 $ 46,809 ========== ============ ========= Net income WCB $ 8,424 $ 7,549 $ 6,774 NBG 8,322 7,154 6,093 BNB 1,142 - - PSB 2,674 2,005 2,039 FTB 1,827 1,523 1,367 ---------- ----------- --------- Total segment net income 22,389 18,231 16,273 Parent, non-bank subsidiaries and eliminations, net (1,176) (131) (316) ---------- ----------- --------- Total net income $ 21,213 $ 18,100 $ 15,957 ========== =========== ========= Assets WCB $ 551,346 $ 494,589 $ 452,353 NBG 546,539 488,181 417,120 BNB 362,645 - - PSB 177,000 171,186 141,363 FTB 161,763 131,638 122,052 ---------- ----------- --------- Total segment assets 1,799,293 1,285,594 1,132,888 Parent, non-bank subsidiaries and eliminations, net (4,997) 3,733 3,572 ---------- ----------- --------- Total assets $ 1,794,296 $ 1,289,327 $ 1,136,460 =========== ========== ========
63 (16) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS The following are the condensed statements of condition of FII as of December 31, 2001 and 2000, and the condensed statements of income and cash flows for the years ended December 31, 2001, 2000 and 1999: CONDENSED STATEMENTS OF CONDITION
(Dollars in thousands) 2001 2000 ------------- -------------- Assets: Cash and due from subsidiaries $ 7,186 $ 17,116 Securities available for sale, at fair value 1,333 1,215 Investment in subsidiaries 163,053 89,808 Accrued dividends receivable from subsidiaries - 22,962 Other assets 5,236 4,135 ------------- ------------- Total assets $ 176,808 $ 135,236 ============= ============= Liabilities and equity: Due to subsidiaries $ 16,702 $ - Short-term borrowings 500 - Long-term borrowings 5,000 - Other liabilities 5,419 3,618 Shareholders' equity 149,187 131,618 ------------- ------------- Total liabilities and equity $ 176,808 $ 135,236 ============= =============
CONDENSED STATEMENTS OF INCOME (Dollars in thousands) 2001 2000 1999
-------------- -------------- -------------- Dividends from subsidiaries $ 16,643 $ 30,115 $ 6,088 Other income 7,577 6,178 5,212 ------------- ------------- ------------- Total income 24,220 36,293 11,300 Expenses 9,602 6,190 5,542 ------------- ------------- ------------- Income before income taxes and equity in earnings of subsidiaries 14,618 30,103 5,758 Income tax benefit (expense) 788 (33) 93 ------------- ------------- ------------- Income before equity earnings in subsidiaries 15,406 30,070 5,851 Equity in undistributed earnings (dividends in excess of earnings) of subsidiaries 5,807 (11,970) 10,106 ------------- ------------- ------------- Net income $ 21,213 $ 18,100 $ 15,957 ============= ============= =============
64
CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) 2001 2000 1999 -------------- -------------- -------------- Cash flows from operating activities: Net income $ 21,213 $ 18,100 $ 15,957 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 711 620 842 Dividends in excess of earnings (equity in undistributed earnings) of subsidiaries (5,807) 11,970 (10,106) Deferred income tax (benefit) expense (102) (56) 58 Decrease (increase) in accrued dividends receivable from subsidiaries 22,962 (22,962) - Increase in other assets (1,139) (181) (141) Decrease (increase) in accrued expense and other liabilities 1,562 230 (78) ------------- ------------- ------------- Net cash provided by operating activities 39,400 7,721 6,532 ------------- ------------- ------------- Cash flows from investing activities: Equity investment in subsidiaries, net (63,381) - (154) Purchase of securities available for sale - (140) (520) Purchase of premises and equipment, net (1,109) (340) (319) -------------- ------------- ------------- Net cash used in investing activities (64,490) (480) (993) ------------- ------------- ------------- Cash flows from financing activities: Proceeds from short-term borrowings 500 - - Proceeds from long-term borrowings 5,000 - - Repayment of long-term borrowings - (1,698) (42) Proceeds from issuance of guaranteed preferred beneficial interests in corporation's junior subordinated debentures 16,200 - - Issuance (repurchase) of preferred and common shares, net 11 (425) (54) Dividends paid (6,551) (5,788) (4,988) Proceeds from initial public offering, net of costs - - 13,623 ------------- ------------- ------------- Net cash provided by (used in) financing activities 15,160 (7,911) 8,539 ------------- ------------- ------------- Net (decrease) increase in cash and cash equivalents (9,930) (670) 14,078 Cash and cash equivalents at beginning of the year 17,116 17,786 3,708 ------------- ------------- ------------- Cash and cash equivalents at end of the year $ 7,186 $ 17,116 $ 17,786 ============= ============= =============
65 SUPPLEMENTARY DATA (UNAUDITED) Quarterly Financial Information
Income Diluted Net Provision Before Earnings Per (Dollars in thousands, Interest for Loan Income Net Common except per share data) Income Losses Taxes Income Share ------ ------ ----- ------ ----- 2001 First quarter $ 13,589 $ 811 $ 7,319 $ 4,805 $ 0.40 Second quarter 15,985 1,026 8,002 5,185 0.43 Third quarter 17,138 1,563 8,268 5,360 0.45 Fourth quarter 18,062 1,558 8,657 5,863 0.49 2000 First quarter $ 12,633 $ 835 $ 6,712 $ 4,294 $ 0.36 Second quarter 13,090 1,172 6,960 4,449 0.37 Third quarter 13,418 1,100 7,231 4,665 0.39 Fourth quarter 13,721 1,104 7,001 4,692 0.39
66 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Financial Institutions, Inc.: We have audited the accompanying consolidated statements of financial condition of Financial Institutions, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Financial Institutions, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Buffalo, New York January 22, 2002 67 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors and all of the executive officers of the Registrant on pages 3, 9, 12 and 13 of the Proxy Statement for its 2002 Annual Meeting of Shareholders to be filed with the U.S. Securities and Exchange Commission is incorporated herein by reference thereto. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation on pages 7, 8 and 9 of the Registrant's Proxy Statement for its 2002 Annual Meeting of Shareholders to be filed with the U.S. Securities and Exchange Commission is incorporated herein by reference thereto. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners of the Company's management on page 4 of the Registrant's Proxy Statement for its 2002 Annual Meeting of Shareholders to be filed with the U.S. Securities and Exchange Commission is incorporated herein by reference thereto. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions on pages 12 and 13 of the Registrant's Proxy Statement for its 2002 Annual Meeting of Shareholders to be filed with the U.S. Securities and Exchange Commission is incorporated herein by reference thereto. 68 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT (1) FINANCIAL STATEMENTS. The financial statements listed below and the Independent Auditors' Report are included in this Annual Report on Form 10-K: Independent Auditors' Report Consolidated Statements of Financial Condition as of December 31, 2001 and 2000 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements (2) SCHEDULES. All schedules are omitted since the required information is either not applicable, not required, or is contained in the respective financial statements or in the notes thereto. 69
(3) EXHIBITS. The following is a list of all exhibits filed or incorporated by reference as part of this Registration Statement. Exhibit No. Description Location - ------------- -------------------------------------------- ----------------------------------- 3.1 Amended and Restated Certificate of Contained in Exhibit 3.1 of the Incorporation Registrant's Registration Statement on Form S-1 dated June 25, 1999 (File No. 333-76865) (The "S-1 Registration Statement") 3.2 Amended and Restated Bylaws Filed Herewith 10.1 1999 Management Stock Incentive Plan Contained in Exhibit 10.1 of the S-1 Registration Statement 10.2 1999 Directors Stock Incentive Plan Contained in Exhibit 10.2 of the S-1 Registration Statement 10.3 Employment Agreement for Filed Herewith Peter G. Humphrey 10.4 Employment Agreement for Filed Herewith John R. Koelmel 10.5 Employment Agreement for Filed Herewith Jon J. Cooper 10.6 Employment Agreement for Filed Herewith Thomas L. Kime 10.7 Employment Agreement for Filed Herewith Douglas McCabe 10.8 Employment Agreement for Filed Herewith Randolph C. Brown 10.9 Employment Agreement for Filed Herewith Patrick C. Burke 11.1 Statement of Computation of Per Share Earnings Contained in Note 1 of the Registrant's Consolidated Financial Statements Under Item 8 Filed Herewith 21.1 Subsidiaries of Financial Institutions, Inc. Filed Herewith 23.1 Consent of KPMG LLP Filed Herewith
(B) REPORTS ON FORM 8-K The Company filed no Current Reports on Form 8-K during the quarter ended December 31, 2001. 70 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: March 11, 2002 By: /s/ Peter G. Humphrey --------------------- Peter G. Humphrey President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date /s/ Peter G. Humphrey March 11, 2002 - ------------------------------- President, Chief Executive Peter G. Humphrey Officer (Principal Executive Officer), Chairman of the Board and Director /s/ John R. Koelmel March 11, 2002 - ------------------------------- Senior Vice President John R. Koelmel and Chief Administrative Officer /s/ Ronald A. Miller March 11, 2002 - ------------------------------- Senior Vice President Ronald A. Miller and Chief Financial Officer (Principal Accounting Officer) /s/ W.J. Humphrey, Jr. Director March 11, 2002 - ------------------------------- W.J. Humphrey, Jr. /s/ Jon J. Cooper Director and Senior Vice President March 11, 2002 - ------------------------------- Jon J. Cooper /s/ Barton P. Dambra Director March 11, 2002 - ------------------------------- Barton P. Dambra /s/ Samuel M. Gullo Director March 11, 2002 - ------------------------------- Samuel M. Gullo /s/ Thomas L. Kime Director and Senior Vice President March 11, 2002 - ------------------------------- Thomas L. Kime /s/ H. Jack South Director March 11, 2002 - ------------------------------- H. Jack South /s/ John Tyler, Jr. Director March 11, 2002 - ------------------------------- John Tyler, Jr. /s/ Bryan G. vonHahmann Director March 11, 2002 - ------------------------------- Bryan G. vonHahmann /s/ James H. Wycoff Director March 11, 2002 - ------------------------------- James H. Wycoff /s/ Douglas L. McCabe Director and Senior Vice President March 11, 2002 - ------------------------------- Douglas L. McCabe /s/ Randy C. Brown Director and Senior Vice President March 11, 2002 - ------------------------------- Randy C. Brown
EX-3 3 fiibylaws.txt EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS EX.3.2 (Exhibit 3.2) Amended and Restated Bylaws BY-LAWS OF FINANCIAL INSTITUTIONS, INC. ARTICLE I SHAREHOLDERS Section 1. Annual Meetings. The annual meeting of the shareholders for the election of directors and the transaction of other business shall be held each year on such day and at such hour as shall be fixed by the Board of Directors. Section 2. Special Meetings. A special meeting of the shareholders may be called at any time by (a) the holders of a majority of the outstanding shares who would be entitled to vote at the meeting, (b) the Board of Directors or (c) the President, and such meeting shall be held on such day and at such hour as is fixed in the call of the meeting. Section 3. Place of Meetings. Meetings of shareholders shall be held at the principal office of the Corporation or at such other place, within or without the State of New York, as may be fixed by the Board of Directors. Section 4. Notice of Meetings. Notice of each meeting of shareholders shall be in writing and shall state the place, date, and hour of the meeting. Notice of a special meeting also shall state the purpose or purposes for which the meeting is called and shall indicate who called the meeting. A copy of the notice of any meeting shall be given, personally or by mail, not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each shareholder entitled to vote at the meeting. If mailed, such notice is given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at such address as appears on the record of shareholders, or, if the shareholder shall have filed with the Secretary a written request that notices be mailed to some other address, then directed to the shareholder at such other address. Notice of meetings of shareholders need not be given to any shareholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any shareholder at a meeting, whether in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him or her. Section 5. Organization. At each meeting of shareholders, the Chairman, or in the Chairman's absence, the President or the Chairman's designee shall preside as chairman of the meeting and the Secretary, or in the Secretary's absence an Assistant Secretary, shall act as secretary of the meeting. If none of those designated to preside or to act as secretary of the meeting shall be present, the shareholders present in person or by proxy and entitled to vote at the meeting shall select someone to preside or to act as secretary, as may be needed. Section 6. Quorum. At each meeting of shareholders, except as otherwise provided by law, the holders of a majority of the shares entitled to vote thereat, present in person or by proxy, shall constitute a quorum for the transaction of business. -2- Section 7. Voting. Except as otherwise provided by law or by the Certificate of Incorporation, at each meeting of shareholders, every shareholder of record shall be entitled to cast one vote for every share of stock standing in his or her name on the record of shareholders. Except as otherwise provided by law or by the Certificate of Incorporation, all matters shall be determined by a majority of the votes cast, except that directors shall be elected by a plurality of the votes cast. Section 8. Proxies. (a) Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for him or her by proxy. (b) No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except as otherwise provided by law. (c) The authority of the holder of a proxy to act shall not be revoked by the incompetence or death of the shareholder who executed the proxy unless, before the authority is exercised, written notice of an adjudication of such incompetence or of such death is received by the Secretary or an Assistant Secretary. (d) Without limiting the manner in which a shareholder may authorize another person or persons to act for him or her as proxy pursuant to paragraph (a) of this Section, the following shall constitute a valid means by which a shareholder may grant such authority: (1) A shareholder may execute a writing authorizing another person or persons to act for him as proxy. Execution may be accomplished by the shareholder or the shareholder's authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. (2) A shareholder may authorize another person or persons to act for the shareholder as proxy by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be reasonably determined that the telegram, cablegram or other electronic transmission was authorized by the shareholder. If it is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors shall specify the nature of the information upon which they relied. (e) Any copy, facsimile telecommunications or other reliable reproduction of the writing or transmission created pursuant to paragraph (d) of this Section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile, telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. -3- Section 9. List of Shareholders at Meetings. A list of shareholders as of the record date, certified by the corporate officer responsible for its preparation or by a transfer agent, shall be produced at any meeting of shareholders upon the request thereat or prior thereto of any shareholder. Section 10. Action Without a Meeting. Action may be taken by written consent of the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Section 11. Introduction of Business at a Meeting of Shareholders. At an annual meeting of shareholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before the annual meeting of shareholders (a) by, or at the direction of, the Board of Directors, or (b) by a shareholder of the Corporation who complies with the procedures set forth in this Section 11. For business or a proposal to be properly brought before an annual meeting of shareholders by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the scheduled date of the annual meeting, regardless of any postponement, deferrals or adjournments of that meeting to a later date; provided, however, that if less than 70 days' notice or prior public disclosure of the date of the annual meeting is given or made to shareholders, notice by the shareholder to be timely must be so delivered or received not later than the close of business on the 10th day following the earlier of (i) the day on which such notice of the date of the meeting was mailed or (ii) the day on which such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before an annual meeting of shareholders (i) a description, in 500 words or less, of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business and any other shareholder proposing such business and any other shareholders known by such shareholder to be supporting such proposal, (iii) the class and number of shares of the Corporation which are beneficially owned by such shareholder on the date of such shareholder's notice and by any other shareholders known by such shareholder to be supporting such proposal on the date of such shareholder's notice, (iv) a description, in 500 words or less, of any interest of the shareholder in such proposal, and (v) a representation that the shareholder is a holder of record of stock of the Corporation and intends to appear in person or by proxy at the meeting to present the proposal specified in the notice. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at a meeting of shareholders except in accordance with the procedures set forth in this Section 11. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the procedures prescribed by the By-Laws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing, nothing in this Section 11 shall be interpreted or construed to -4- require the inclusion of information about any such proposal in any proxy statement distributed by, at the direction of, or on behalf of, the Board of Directors. ARTICLE II BOARD OF DIRECTORS Section 1. General Power. Except as otherwise provided in the Certificate of Incorporation of the Corporation, the business, property, and affairs of the Corporation shall be managed under the direction of its Board of Directors. Section 2. Number. The number of directors constituting the entire Board of Directors shall be such number as shall be fixed from time to time by the Board of Directors, provided that no decrease in the number of directors shall shorten the term of any incumbent director, and further provided that, if all the shares of the Corporation are owned beneficially and of record by less than three shareholders, the number of directors may be less than three but not less than the number of shareholders. The Board of Directors shall be divided into three classes of approximately equal number. The term of one class of directors shall expire at each annual meeting. Section 3. Election and Term of Directors. Directors shall, except as otherwise required by law, be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. At each annual meeting one class of directors shall be elected, each to hold office until the third succeeding annual meeting and until his successor has been elected and qualified. A director elected to a newly created directorship shall be elected to hold office until the expiration of the terms of the other directors in the class to which he is assigned, and a director elected to fill a vacancy shall be elected to fill such vacancy for the remainder of such term. Section 4. Meetings of the Board. An annual meeting of the Board of Directors shall be held in each year directly after adjournment of the annual meeting of shareholders. Other regular meetings of the Board shall be held at such times as may from time to time be fixed by resolution of the Board. Special meetings of the Board may be held at any time upon the call of the President or a majority of the members of the Board of Directors. Meetings of the Board of Directors shall be held at such place, within or without the State of New York, as from time to time may be fixed by resolution of the Board or by order of the President. If no place is so fixed, meetings of the Board shall be held at the principal office of the Corporation. Section 5. Notice of Meetings. Notice of regular meetings of the Board of Directors need not be given. Notice of each special meeting shall be mailed to each director, addressed to the address last given by each director to the Secretary or, if none has been given, to the director's residence or usual place of business, at least three days before the day on which the meeting is to be held, or shall be sent to the director by facsimile, electronic transmission, or similar means so addressed or shall be delivered personally or by telephone, at least twenty-four (24) hours before the time the meeting is to be held. Each notice shall state the time and place of -5- the meeting but need not state the purposes thereof except as otherwise expressly required by law. Notices of any such meeting need not be given to any director who submits a signed waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice. Section 6. Quorum and Manner of Acting. At each meeting of the Board of Directors the presence of a majority of the entire Board shall constitute a quorum for the transaction of business, and the vote of a majority of the directors present at the time of the vote, if a quorum is present at that time, shall be the act of the Board. Section 7. Action Without a Meeting. Any action required or permitted to be taken by the Board or any committee thereof may be taken without a meeting if all members of the Board or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board or committee shall be filed with the minutes of the proceedings of the Board or committee. Section 8. Participation in Board Meetings by Conference Telephone. Any one or more members of the Board of Directors or any committee thereof may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 9. Executive and Other Committees of Directors. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members an executive committee and other committees, each consisting of one or more directors, and each of which, to the extent provided in the resolution, shall have all the authority of the Board, except that no such committee shall have authority as to the following matters: (1) The submission to shareholders of any action that needs shareholders' approval under the New York Business Corporation Law; (2) The filling of vacancies in the Board of Directors or in any committee; (3) The fixing of compensation of the directors for serving on the Board or on any committee; (4) The amendment or repeal of the By-laws, or the adoption of new By-laws; and (5) The amendment or repeal of any resolution of the Board which by its terms shall not be so amendable or repealable. Except to the extent otherwise determined by the Board of Directors, each committee shall fix its own rules of procedure. Regular meetings of each committee shall be held at such times as may be fixed from time to time by resolution of the Board or the committee. Special meetings shall be held whenever called by the President or the chairman of the committee. The notice provisions of Article II, Section 5, of the By-Laws shall apply to regular and special meetings of committees. Unless a greater proportion is required by the resolution designating a committee of -6- the Board of Directors, a majority of the entire committee shall constitute a quorum for the transaction of business or of any specified item of business, and the vote of a majority of the members present at the time of such vote, if a quorum is present at such time, shall be the act of the committee. The Board may designate one or more directors as alternate members of any such committee, who may replace any absent member or members at any meeting of such committee. Section 10. Resignation and Removal. Any director may resign at any time by giving written notice to the President or to the Secretary. Such resignation shall take effect at the time specified therein or, if no time be specified, then on delivery and, unless otherwise specified therein, the acceptance of such resignation by the Board of Directors shall not be needed to make it effective. Any or all of the directors may be removed, at any time, with or without cause, by vote of the shareholders at a special meeting of shareholders, and any vacancy thereby created may be filled at said meeting by vote of the shareholders and, if not so filled, then by the directors as provided in Section 11 of this Article. Mandatory retirement shall be required of any director upon attaining the age of seventy (70). Directors who reach their 70th birthday shall complete their remaining term, but shall not stand for re-election. Section 11. Vacancies. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board of Directors for any reason may be filled by vote of a majority of the directors then in office, even if less than a quorum exists. A director elected to fill a newly created directorship or a vacancy shall hold office for the period described in Article II, Section 3. Section 12. Nominations and Qualifications of Directors. Only persons nominated in accordance with the procedures set forth in this Section shall be eligible for election as directors. Nominations of persons for election to the Board may be made at an annual meeting of shareholders or special meeting of shareholders called by the Board of Directors for the purpose of electing directors (i) by or at the direction of the Board, or (ii) by any shareholder of the Corporation entitled to vote for the election of directors at such meeting who complies with the notice procedures set forth in this Section 12. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the scheduled date of the meeting, regardless of postponements, deferrals, or adjournments of that meeting to a later date; provided, however, that if less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so delivered or received not later than the close of business on the 10th day following the earlier of (i) the day on which such notice of the date of such meeting was mailed or (ii) the day on which such public disclosure was made. A shareholder's notice to the Secretary shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a director (a) the name, age, business address and residence address of such person, (b) the principal occupation or employment of such person, (c) the class and number of shares of the Corporation which are beneficially owned by such person on the date of such shareholder's notice and (d) any other information relating to such person that is required to be disclosed in solicitations of proxies for -7- election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, or any successor regulation (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to the shareholder giving the notice (a) the name and address, as they appear on the Corporation's books, of such shareholder and any other shareholders known by such shareholder to be supporting such nominee(s), (b) the class and number of shares of the Corporation which are beneficially owned by such shareholder on the date of such shareholder's notice and by any other shareholders known by such shareholder to be supporting such nominee(s) on the date of such shareholder's notice, (c) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; and (iii) a description of all arrangements or understandings between the shareholder and each nominee and other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder. No persons shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 12. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the By-Laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III OFFICERS Section 1. Officers Enumerated. The officers of the Corporation shall be a President, one or more Vice Presidents, a Secretary, and a Treasurer, and such other officers as the Board of Directors may in its discretion elect. Any two or more offices may be held by the same person. Section 2. Election and Term of Office. All officers shall be elected by the Board of Directors at its first meeting held after the annual election of directors. The officers need not be directors. Subject always to the right of the Board of Directors to remove an officer with or without cause, each officer shall hold office at the pleasure of the Board of Directors. Section 3. Chairman of the Board. The Chairman of the Board of Directors, if there is one, shall perform such duties and exercise such other powers which may from time to time be assigned to him by the Board of Directors. Section 4. The President. The President shall be the chief executive officer of the Corporation and, subject to the determinations of the Board of Directors, shall have general control and management of the business, property, and affairs of the Corporation. The President shall, in the absence of the Chairman of the Board, preside at all meetings of the Board of Directors at which he is present. In the absence or incapacity of any other officer of the Corporation, the President shall have the authority and may perform the duties of that officer. -8- Section 5. The Vice Presidents. Each Vice President, if any, shall, in the absence or incapacity of the President and in order of seniority as fixed by the Board, have the authority and perform the duties of the President, and each shall have such other authority and perform such other duties as the Board of Directors may prescribe. Section 6. The Secretary. The Secretary (a) shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose, (b) shall perform like duties for committees of the Board when required, (c) shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and (d) shall have such other authority and perform such other duties as usually pertain to the office or as may be prescribed by the Board of Directors. The Secretary shall keep in safe custody the seal of the Corporation and, when authorized by the Board of Directors or the President, affix the same to any instrument requiring it, and when so affixed, it shall be attested by the signature of the Secretary or Treasurer. Section 7. The Treasurer. The Treasurer (a) shall have the care and custody of all the moneys and securities of the Corporation, (b) shall keep or cause to be kept complete and accurate books of account of all moneys received and paid on account of the Corporation, (c) shall sign such instruments as require the Treasurer's signature, and (d) shall have such other authority and perform such other duties as usually pertain to the office or as the Board of Directors may prescribe. Section 8. Assistant Officers. Any Assistant Vice President, Assistant Secretary, or Assistant Treasurer elected by the Board of Directors, (a) shall assist the Vice President, Secretary, or Treasurer, respectively, as the case may be, (b) shall possess that officer's authority and perform that officer's duties in that officer's absence or incapacity, and, (c) shall have such other authority and perform such other duties as the Board of Directors may prescribe. Section 9. Appointed Officers. The Board of Directors may delegate to any officer or committee the power to appoint and to remove any subordinate officer, agent, or employee. Section 10. Securities of Other Corporations. The President or the Treasurer may, with respect to any shares of stock or other securities issued by any other corporation or other business organization and held by the Corporation, exercise voting and similar rights on behalf of the Corporation and execute proxies for that purpose. In addition, either such officer may endorse for sale or transfer and may sell or transfer for and on behalf of the Corporation any such stock or other securities and may appoint proxies or attorneys for that purpose. ARTICLE IV SHARES AND THEIR TRANSFER Section 1. Certificates of Stock. Every shareholder shall be entitled to have one or more certificates, in such form as the Board of Directors may from time to time prescribe, representing in the aggregate the number of shares of stock of the Corporation owned by said shareholder, -9- which certificates shall be signed by, or in the name of, the Corporation by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. The Board may decide in its discretion to prescribe book-entry or uncertificated securities in lieu of or in addition to certificates. Section 2. Transfers. Shares of stock of the Corporation shall be transferable on the books of the Corporation by the registered holder thereof in person or by such holder's duly authorized attorney, but, except as hereinafter provided in the case of loss, destruction, or mutilation of certificates, no transfer of shares shall be entered until the previously issued certificate representing those shares shall have been surrendered and canceled. Except as otherwise required by law, the Corporation shall be entitled to treat the person registered as the holder of shares on its books as the owner thereof for all purposes regardless of any notice or knowledge to the contrary. Section 3. Lost, Destroyed or Mutilated Certificates. The Corporation may issue a new certificate representing shares of stock of the same tenor and the same number of shares in place of a certificate theretofore issued by it that is alleged to have been lost, stolen, or destroyed; provided, however, that the Board of Directors may require the owner of the lost, stolen, or destroyed certificate, or such owner's legal representative, to give the Corporation a bond or indemnity, in form and with one or more sureties satisfactory to the Board, sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate or the issuance of such new certificate. ARTICLE V INDEMNIFICATION Section 1. Indemnification of Directors and Officers. To the full extent authorized or permitted by law, the Corporation shall indemnify any person ("Indemnified Person") made, or threatened to be made, a party to any action or proceeding, whether civil, at law, in equity, criminal, administrative, investigative or otherwise, including any action by or in the right of the Corporation, by reason of the fact that he, his testator or intestate, ("Responsible Person"), whether before or after adoption of this Article (a) is or was a director, or officer of the Corporation, or (b) if a director or officer of the Corporation, is serving or served, in any capacity, at the request of the Corporation, any other corporation, or any partnership, joint venture, trust, employee benefit plan or other enterprise, or (c) if not a director or officer of the Corporation, is serving or served, at the request of the Corporation, as a director or officer of any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, against all judgments, fines, penalties, amounts paid in settlement (provided the Corporation shall have consented to such settlement, which consent shall not be unreasonably withheld by it) and reasonable expenses, including attorneys' fees and costs of investigation, incurred by such Indemnified Person with respect to any such threatened or actual action or proceeding, and any appeal therein, provided only that (x) acts of the Responsible Person which were material to the cause of action so adjudicated or otherwise disposed of were not (i) committed in bad faith or (ii) were not the result of active and deliberate dishonesty, and (y) the -10- Responsible Person did not personally gain in fact a financial profit or other advantage to which he was not legally entitled. Section 2. Advancement of Expenses. All expenses reasonably incurred by an Indemnified Person in connection with a threatened or actual action or proceeding with respect to which such person is or may be entitled to indemnification under this Article shall be advanced or promptly reimbursed by the Corporation to him in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by him or on his behalf to repay the amount of such advances, if any, as to which he is ultimately found not to be entitled to indemnification or, where indemnification is granted, to the extent such advances exceed the indemnification to which he is entitled. Section 3. Procedure for Indemnification. (a) Not later than thirty (30) days following final disposition of an action or proceeding with respect to which the Corporation has received written request by an Indemnified Person for indemnification pursuant to this Article, if such indemnification has not been ordered by a court, the Board of Directors shall meet and find whether the Responsible Person met the standard of conduct set forth in Section 1 of this Article, and, if it finds that he did, or to the extent it so finds, shall authorize such indemnification. (b) Such standard shall be found to have been met unless (i) a judgment or other final adjudication adverse to the Indemnified Person establishes that (A) acts of the Responsible Person were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or (B) the Responsible Person personally gained in fact a financial profit or other advantage to which he was not legally entitled; or (ii) if the action or proceeding was disposed of other than by judgment or other final adjudication, the Board finds in good faith that, if it had been disposed of by judgment or other final adjudication, such judgment or other final adjudication would have been adverse to the Indemnified Person and would have established (A) or (B) above. (c) If indemnification is denied, in whole or part, because of such a finding by the Board in the absence of a judgment or other final adjudication, or because the Board believes the expenses for which indemnification is requested to be unreasonable, such action by the Board shall in no way affect the right of the Indemnified Person to make application therefor in any court having jurisdiction thereof, and in such action or proceeding the issue shall be whether the Responsible Person met the standard of conduct set forth in Section 1, or whether the expenses were reasonable, as the case may be; not whether the finding of the Board with respect thereto was correct; and the determination of such issue shall not be affected by the Board's finding. If the judgment or other final adjudication in such action or proceeding establishes that the Responsible Person met the standard set forth in Section 1, or that the disallowed expenses were reasonable, or to the extent that it does, the Board shall then find such standard to have been met if it has not done so, and shall grant such indemnification, and shall also grant to the Indemnified Person indemnification of the expenses incurred by him in connection with the action or proceeding resulting in the judgment or other final adjudication that such standard of conduct was met, or if pursuant to such court determination such person is entitled to less than the full -11- amount of indemnification denied by the Corporation, the portion of such expenses proportionate to the amount of such indemnification so awarded. (d) A finding by the Board pursuant to this Section that the standard of conduct set forth in Section 1 has been met shall mean a finding (i) by a quorum consisting of directors who are not parties to such action or proceeding or, (ii) if such a quorum is not obtainable or, if obtainable, such a quorum is unable to make such a finding and so directs, (A) by the Board upon the written opinion of independent legal counsel that indemnification is proper in the circumstances because the applicable standard of conduct has been met, or (B) by the shareholders upon a finding that such standard has been met, such action by the Board or shareholders to be taken as promptly as is practicable. Section 4. Contractual Article. This Article shall be deemed to constitute a contract between the Corporation and each director and each officer of the Corporation who serves as such at any time while this Article is in effect. No repeal or amendment of this Article, insofar as it reduces the extent of the indemnification of any person who could be a Responsible Person shall without his written consent be effective as to such person with respect to any event, act or omission occurring or allegedly occurring (a) prior to the date of such repeal or amendment if on that date he is not serving in any capacity for which he could be a Responsible Person, or (b) prior to the thirtieth (30th) day following delivery to him of written notice of such amendment as to any capacity in which he is serving on the date of such repeal or amendment, other than as a director or officer of the Corporation, for which he could be a Responsible Person, or (c) the later of the thirtieth (30th) day following delivery to him of such notice or the end of the term of office (for whatever reason) he is serving as director or officer of the Corporation when such repeal or amendment is adopted, with respect to being a Responsible Person in that capacity. No amendment of the Business Corporation Law shall, insofar as it reduces the permissible extent of the right of indemnification of a Responsible Person under this Article, be effective as to such person with respect to any event, act or omission occurring or allegedly occurring prior to the effective date of such amendment. This Article shall be binding on any successor to the Corporation, including any corporation or other entity which acquires all or substantially all of the Corporation's assets. Section 5. Insurance. The Corporation may, but need not, maintain insurance insuring the Corporation or persons entitled to indemnification under Section 1 of this Article for liabilities against which they are entitled to indemnification under this Article or insuring such persons for liabilities against which they are not entitled to indemnification under this Article. Section 6. Indemnification of Employees and Agents. The Corporation may, to the extent authorized by the Board of Directors, grant rights of indemnification and advancement of expenses to any employee or agent of the Corporation to the full extent of the provisions of this Article with respect to indemnification and advancement of expenses of directors and officers of the Corporation. Section 7. Non-exclusivity. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which any person covered hereby may be entitled other than pursuant to this Article. The Corporation is authorized to enter into agreements with any -12- such person or persons providing them rights to indemnification or advancement of expenses in addition to the provisions therefor in this Article to the full extent permitted by law. ARTICLE VI GENERAL Section 1. Seal. The seal of the Corporation shall be in the form of a circle and shall bear matters deemed appropriate by the Board of Directors. Section 2. Fiscal Year. The fiscal year of the Corporation shall end at the close of business on December 31 of each calendar year. ARTICLE VII AMENDMENTS Section 1. Power to Amend. Both the shareholders and the Board of Directors shall have the power to adopt, amend, or repeal by-laws. Any by-law adopted by the Board may be amended or repealed by the shareholders at any annual or special meeting of the shareholders. Section 2. Amendment Affecting Election of Directors. If any by-law regulating an impending election of directors is adopted, amended, or repealed by the Board, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the by-law so adopted, amended, or repealed, together with a concise statement of the changes made. EX-10 4 humphreyempl.txt EXHIBIT 10.3 EMPLOYMENT AGREEMENT/HUMPHREY EX-10.3 (Exhibit 10.3) Employment Agreement-Peter G. Humphrey Amended 6/2001 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of the 25th day of June 1999, between FINANCIAL INSTITUTIONS, INC. ("Employer"), a bank holding company, chartered under the laws of New York, having its principal office at 220 Liberty Street, Warsaw, New York 14569 and PETER G. HUMPHREY ("Executive"), an individual residing at 230 W. Buffalo Street, Warsaw, New York 14569. WHEREAS, Employer wishes to employ Executive in an executive capacity, as its President, and Executive wishes to accept such employment on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants herein contained, Employer and Executive hereby agree as follows: 1. Effective Date; Term. 1.1 Effective Date. This Agreement shall be effective commencing on the date hereof (the "Effective Date"). 1.2 Initial Term. Employer employs Executive, and Executive accepts such employment, for a three (3) year period commencing on the Effective Date (the "Initial Term"). 1.3 Renewal Term. This Agreement will automatically renew for successive three year terms (each a "Renewal Term") upon the expiration of the Initial Term or a subsequent Renewal Term unless either party provides written notice to the other at least ninety (90) days before the end of the Initial Term or Renewal Term that such party does not intend to renew this Agreement upon the expiration thereof. 1.4 Termination. This Agreement may be terminated prior to the expiration of the Initial Term or any Renewal Term as provided in Sections 4.1 and 4.4 of this Agreement (see Early Retired Employee). 2. Scope of Employment. 2.1 Position and Duties. During the term of this Agreement, Employer shall employ Executive to serve as the President of Employer. In such capacity, Executive shall perform such executive, administrative and operational duties as may be assigned to Executive from time to time by the Board of Directors of Employer, provided that such assignments are materially consistent with the current job description. 2.2 Exclusive Efforts. Executive agrees to serve Employer faithfully and to the best of Executive's ability and to devote Executive's entire business time, attention and efforts to the interests and business of Employer, its subsidiaries and their affiliates. 1 2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to and perform all his duties in accordance with applicable laws, rules and regulations and the written policies and procedures of Employer in effect from time to time. 3. Compensation, Benefits and Expenses. 3.1 Base Salary. Except as otherwise provided in this Agreement, during the period from the Effective Date through December 31, 1999 (the "First Year") Employer shall pay to Executive a base salary at a rate of $282,000 per year (the "Base Salary"). The Base Salary may be increased, in the sole discretion of Employer, in a manner comparable to other senior executives, during the remainder of the terms of this Agreement, but may not be decreased. Employer shall pay the Base Salary to Executive in equal installments pursuant to Employer's standard payroll policies and Executive's salary shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may receive bonuses as follows: 3.2.1 If the Employer meets or exceeds target performance factors pursuant to the Employer's senior management incentive compensation plan, the Executive shall be paid a bonus which shall be determined by the Compensation Committee of the Board of Directors of Employer. 3.2.2 The bonus earned by Executive each year during the term of this Agreement, if any, shall be paid to Executive in a lump sum promptly after the Employer's audited annual financial results are publicly disclosed. 3.2.3 Payment of any bonus shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.3 Incentive Stock Plan Benefits. During the period of his employment, Executive shall be entitled to receive grants of options under any incentive stock plan operated by Financial Institutions, Inc. ("FII") for its employees and those of its subsidiaries, in such amounts as may be determined by the FII Board of Directors or by the FII Compensation Committee, in a manner comparable to other senior executives of FII. 3.4 Fringe Benefits. During the period of his employment, Executive shall be entitled to participate in FII's plans for the welfare and benefit of its employees to the extent Executive satisfies the requirements provided in such health plans, including health standards, and other qualifications for participation. In the event Executive becomes a "Retired Early Employee" as defined in subparagraph 4.4.1, or is terminated for reasons other than those set forth in subparagraphs 4.1.3, 4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as if Executive continued to remain an employee for the remainder of the Initial Term or Renewal Term then in effect, or until Executive obtains a position offering comparable benefits, whichever occurs first. 3.5 Vacation and Holidays. During the term of this Agreement, Executive shall accrue paid vacation in accordance with Employer's policies of four (4) weeks per calendar year. 2 Executive shall be entitled to take accrued vacation days and paid holidays in accordance with Employer's policies applicable to its employees generally. Executive may not carry forward vacation days from year to year. 3.6 Expenses. During the term of this Agreement, Employer authorizes Executive to incur reasonable and necessary out-of-pocket business expenses in the course of performing his duties and rendering services hereunder in accordance with Employer's policies with respect thereto, and Employer shall reimburse Executive for all such expenses, provided (i) such expenses and the purpose for which they were incurred, are in accordance with Employer's policies, and (ii) Executive timely submits to Employer expense reports and substantiation of the expenses in accordance with Employer's policies. 3.7 Country Club Dues and Automobile Expenses. During the term of this Agreement, Employer shall reimburse Executive for monthly membership dues at a country club of Executive's choosing, and shall provide Executive with use of a suitable automobile. 4. Termination of Employment. 4.1 Events of Termination. Executive's Employment by Employer shall terminate at the expiration of the Initial Term or any Renewal Term provided timely notice is given as provided in Section 1.3 and shall terminate prior to the expiration of the then current term, if any of the following occur: 4.1.1 the death of Executive; 4.1.2 the date on which Executive is (i) determined to be "permanently disabled" as defined under the disability insurance policy covering Executive, or (ii) if Executive is not covered by any such disability policy, Executive is determined to be "totally disabled" by the Board of Directors of Employer based upon the advice of a board certified physician reasonably acceptable to Employer and Executive or his legal representative, which may include a determination that Executive is or may be unable, because of physical or mental illness or incapacity or otherwise, to fulfill his duties under this Agreement for six consecutive months 4.1.3 the commission by Executive of, or the determination by the Board of Directors, based on reasonable evidence of misconduct as presented by a law enforcement agency, or as a result of an internal or external audit or investigation, that the Executive has committed (i) a criminal offense involving the violation of state or federal law], (ii) a breach of fiduciary duty, (iii) a material act of dishonesty, fraud or misrepresentation, or (iv) any act of moral turpitude which the Board of Directors determines has or may be reasonably expected to have a material detrimental impact on Employer's business or operations, or which may prevent, because of its demonstrated or demonstrable effect on employees, regulatory agencies or customers, Executive from effectively performing his executive and other duties under this Agreement; 4.1.4 Executive materially neglects to satisfactorily perform the duties which Executive is required to perform under this Agreement or performs such duties other than in 3 good faith, as determined by the Board of Directors. The Board will provide a written notice to the Executive, specifying the unsatisfactory performance and suggest what must be done to improve and maintain such performance. The written notice will also specify the time period (considered probationary period) given the Executive to correct such conduct. 4.1.5 the termination of Executive's employment by Employer during the term of this Agreement for any reason without cause other than pursuant to Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4; 4.1.6 Executive's resignation or retirement; or 4.1.7 the mutual consent to such termination in writing by Executive and Employer. 4.2 Time of Termination. Executive's employment with Employer shall terminate immediately upon Executive's death, upon written notice of termination from Employer or Executive upon the occurrence of an event specified in Sections 4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified in Section 4.1.4, on the date specified in the agreement terminating Executive's employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or a Renewal Term if timely notice is given pursuant to Section 1.3 (as applicable, the "Termination Date"). Employer's and Employee's obligations under this Agreement shall terminate upon such termination of employment without any further action by the parties except to the extent specifically provided herein. 4.3 Effect of Termination of Employment. Following the Termination Date: 4.3.1 Executive shall return all property of Employer as provided in Section 6 of this Agreement; 4.3.2 Executive's base salary shall cease to accrue; 4.3.3 Subject to Section 4.4, the Board of Directors shall pay an appropriate bonus to Executive as his bonus or other incentive compensation for the period through the Termination Date computed consistently with the manner in which Executive's bonus or incentive compensation would have been determined for such period, as defined in Section 3.2, if Executive's employment had not terminated; 4.3.4 Executive's participation in FII's benefit plans shall cease except as required by law, the terms of the plan(s) or as provided in subparagraph 3.4 of this Agreement; 4.3.5 Executive shall cease to accrue vacation days and shall be paid for unused vacation time accrued in accordance with Employer's policies applicable to employees generally; and 4.3.6 Executive shall submit any claims for reimbursement of business expenses incurred in accordance with Section 3.5 within the time period required under Employer's policies generally or Employer will not be obligated to reimburse such expenses. 4 4.3.7 In the case of an Early Termination, the Employer shall have no further liability to Executive hereunder, except as explicitly stated in this Agreement, other than for earned but unpaid compensation and those benefits (accrued but unpaid) to which Executive is entitled under this Agreement through the Termination Date, including termination in the cases listed in Section 3.4, continued fringe benefits as provided in such Section 3.4. Upon Termination of Employment, for any reason, all split dollar insurance policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.3.8 If, during the term of this Agreement, the Executive is terminated for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2, 4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the two year period after the Termination Date, make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Termination Date, equals the sum of two times the Base Salary Amount paid to Executive, as such term is defined in subparagraph 4.4.7 below, plus the sum of the annual incentive compensation earned by Executive, as determined over the most recent two (2) tax years ending before the Termination Date occurred. It shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. 4.4. Change of Control and Change of Authority 4.4.1 Retired Early Employee. If a Change of Control and Change of Authority, as such terms are defined in subparagraph 4.4.7 below, occurs during the term of the Executive's employment under this Employment Agreement, either the Executive, on the one hand, or Employer, on the other, may elect by written notice, given to the other party or parties, at any time within twelve (12) months after such Change of Control and Change of Authority, to terminate the employment of the Executive by Employer, whereupon the Executive will become a "Retired Early Employee," and will be entitled to receive such payments as are provided hereafter in this Section 4.4. Such election and the termination of the Executive's employment shall become effective on the first day of the second calendar month commencing after delivery of the notice or on such earlier date as the Executive in his sole discretion may specify (the "Effective Date"). 4.4.2 Cash Payments. If the Executive should become a Retired Early Employee hereunder, Employer shall, during the period commencing on the Effective Date and ending three years thereafter (the "Pay-Out Period"), make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Effective Date, equals the sum of three times the Base Salary Amount paid to Executive, as such term is defined in subparagraph 4.4.7 below, plus the sum of the annual incentive compensation earned by Executive, as determined over the most recent three (3) tax years ending before the date on which the Change of Control and Change of Authority occurred. The Executive shall request the method of payment, however, it 5 shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. The payment(s) provided for in subparagraph 4.3.8 do not apply to Retired Early Employees who receive cash payment(s) pursuant to this subparagraph. If at any time during the Pay-Out Period the Compensation Committee of the Board in its sole discretion shall determine, upon application of the Retired Early Employee supported by substantial evidence, that the Retired Early Employee is then under a severe financial hardship resulting from (i) a sudden and unexpected illness or accident of the Retired Early Employee or any of his dependents (as defined in section 152(a) of the Internal Revenue Code), (ii) loss of the Retired Early Employee's property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Retired Early Employee, Employer shall make available to the Retired Early Employee, in one (1) lump sum, an amount up to but not greater than the present value of all monthly payments remaining to be paid to him in the Pay-Out Period, calculated as of the date of such determination by the Compensation Committee of the Board, for the purpose of relieving such severe financial hardship to the extent the same has not been or may not be relieved by (xi) reimbursement or compensation by insurance or otherwise, (xii) liquidation of the Retired Early Employee's assets (to the extent such liquidation would not itself cause severe financial hardship), or (xiii) distributions from other benefit plans. If (a) the lump sum amount thus made available is less than (b) the present value of all such remaining monthly payments, Employer shall continue to pay to the Retired Early Employee monthly payments for the duration of the Pay-Out Period, but from such date forward such monthly payments will be in a reduced amount such that the present value of all such reduced payments will equal the difference between (b) and (a), above. The Retired Early Employee may elect to waive any or all payments due him under this subparagraph. 4.4.3 Acceleration of Stock Options. All options and other rights that Executive may hold to purchase or otherwise acquire Common Stock of FII shall immediately become vested and exercisable in full for the total number of shares that are or might become purchasable thereunder, in each case without further condition or limitation except the giving of notice of exercise and the payment of the purchase price thereunder (but without amendment of the plan under which they were issued). At his discretion, Executive may elect to surrender to Employer his rights in any such options and rights held by him and, upon that surrender, Employer shall pay him an amount in cash equal to the aggregate spread between the exercise prices of all those options and rights and the value of the Common Stock purchasable thereunder (or of any other security into which the Common Stock has been exchanged or converted) as of the date of the termination of employment, the value to be determined by the reported last sale price of the Common Stock or that other security (or the mean between the reported last bid and asked prices) on that date on NASDAQ (or, if it is not NASDAQ, on whatever may then be the principal exchange or quotation system on which the Employer's Common Stock or that other security is traded at that time). 4.4.4 Life Insurance Policies. Employer shall repay any policy loans previously taken on the Employer's insurance policies on Executive's life (provided that the directors of 6 Employer were given written notice promptly after the making of any such loans which were made while Executive was the president and chief executive officer of Employer), and then shall transfer to Executive any and all of its right, title, and interest in and to all Employer life insurance policies on Executive's life (and upon that transfer, Executive shall be deemed to have released Employer from any and all obligations it then owes to him to maintain and pay premiums on those policies, all other provisions of any agreements under which those policies were agreed to be maintained, however, to remain in effect). [Upon termination of employment, all split dollar policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement.] 4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies before receiving all monthly payments payable to him under subparagraph 4.4(b), above, Employer shall pay to the Retired Early Employee's estate, one (1) lump sum payment in an amount equal to the present value of all such remaining unpaid monthly payments, determined as of the date of death of the Retired Early Employee. If the Retired Early Employee was receiving health insurance and dental benefits pursuant to paragraph 3.4 hereof at the time of death, Employer shall continue to provide such health insurance and dental benefits to the dependents of the deceased Retired Early Employee for the duration specified in paragraph 3.4, if the Retired Early Employee had not died. 4.4.6 Indemnification of Executive. In the event a Change of Control and Change of Authority occurs, Employer shall indemnify Executive for all reasonable legal fees and expenses subsequently incurred by Executive through legal counsel approved in advance by Employer [(which approval shall not be unreasonably withheld)] in seeking to obtain or enforce any right or benefit provided under this Employment Agreement, including but not limited to the rights and benefits provided under this Section 4.4 and whether or not Executive has become a Retired Early Employee hereunder, provided, however, that such right to indemnification will not apply if and to the extent that a court of competent jurisdiction shall determine that any such fees and expenses have been incurred as a result of Executive's bad faith or willful misconduct [or if such a court dismisses the action seeking to enforce the right or benefit for failure to state a claim]. Indemnification payments payable hereunder by Employer shall be made not later than thirty (30) days after a request for payment has been received from Executive with such evidence of indemnifiable fees and expenses as Employer may reasonably request. 4.4.7 Definitions. (i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall equal the annual compensation payable by Employer to Executive and includable by Executive in gross income for the most recent year ending before the date on which the Change of Control and Change of Authority occurred. (ii) A "Change of Control" shall be deemed to have occurred if 7 (A) any individual corporation (other than FII), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more securities transactions (including gifts and stock repurchases but excluding transactions described in subdivision (B), following), of securities of FII possessing twenty percent (20%) or more of the voting power for the election of directors of such entity, (B) there shall be consummated any consolidation, merger or stock-for-stock exchange involving FII or the securities of FII in which the holders of voting securities of FII immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of FII (or, if FII does not survive such transaction voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the total voting power in an election of directors of FII (or such other surviving corporation), excluding securities received by any members of such group which represent disproportionate percentage increases in their shareholdings vis-a-vis the other members of such group, (C) "approved directors" shall constitute less than a majority of the entire Board of Directors, with "approved directors" defined to mean the members of the Board of Directors of Employer as of the date of this Agreement and any subsequently elected members who shall be nominated or approved by a majority of the approved directors on the Board prior to such election, or (D) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions, excluding any transaction described in subdivision (B), above), of all, or substantially all, of the assets of FII to a party which is not controlled by or under common control with FII. (iii) A "Change of Authority" shall be deemed to have occurred if upon the occurrence of a Change in Control, Executive, without his/her written consent, is required by Employer to accept any demotion, loss of title, or office, reduction in his annual compensation or benefits, or relocation of his principal place of employment by more than 25 miles from its location immediately prior to the Change in Control; provided, however, that Executive may consent in writing to any such demotion, loss, reduction or relocation. 5. Confidentiality; Inventions. 5.1 Confidential Information. Executive has and will have access to and participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of Employer, its subsidiaries and any affiliates (collectively, the 8 "Companies"), including but not limited to (i) business plans, software programs, operating plans, marketing plans, financial reports, operating data, budgets, wage and salary rates, pricing strategies and information, terms of agreements with suppliers or customers and others, customer lists, reports, correspondence, tapes, disks, tangible property and specifications owned by or used in the Companies' businesses; (ii) operating strengths and weaknesses of the Companies' officers, directors, employees, agents, suppliers and customers, and/or (iii) information pertaining to future developments such as, but not limited to, research and development, software development or enhancement, future marketing plans or ideas, and plans or ideas for new services or products, (iv) all information which is learned or developed by Executive in the course and performance of his duties under this Employment Agreement, including without limitation, reports, information and data relating to the Employer's acquisition strategies, and (v) other tangible and intangible property which is used in the business and operations of the Companies but not made publicly available (i) through (v) are, collectively, (the "Confidential Information"). 5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive shall not, directly or indirectly, disclose, use or make known for his or another's benefit any Confidential Information of the Companies or use such Confidential Information in any way except in the best interests of the Companies in the performance of Executive's duties under this Agreement. In addition, to the extent that Employer has entered into a confidentiality agreement with any other person or entity Executive agrees to comply with the terms of such confidentiality agreement and to be subject to the restrictions and limitations imposed by such confidentiality agreements as if he was a party thereto. 5.3 Inventions. Executive shall promptly disclose both orally and in writing to Employer all discoveries, ideas, software, developments, discoveries, designs, improvements, innovations and inventions (collectively referred to herein as "Inventions"), whether patentable or not, either relating to the existing or contemplated business, products, services, plans, processes, or procedures of Employer, or suggested by or resulting from Executive's work at Employer, or resulting wholly or in part from the use of Employer's time, material, facilities or ideas, which Executive made or conceived or may make or conceive, whether or not during working hours, alone or with others, at any time during the term of this Agreement or within one year thereafter, and Executive agrees that all such inventions shall be the exclusive property of the Employer. 5.4 Assignment of Inventions. Executive hereby assigns to Employer all his rights and interests in and to all such inventions and all patents, copyrights, trademarks or other types of intellectual property protection which may be obtained on them, in this and all foreign countries. At Employer's expense, but without charge to it, Executive agrees to execute, acknowledge and deliver to Employer any specific assignments to any such inventions or other relevant documents and to take any such further action as may be considered necessary by Employer at any time to obtain or defend letters patent in any and all countries, to obtain documents relating to registration, ownership or transfer of copyrights, to vest title in such inventions in Employer or its assigns, or to obtain for Employer any other legal protection for such inventions. 9 5.5 Survival of Obligations. The obligations of Executive under this Section 5 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 6. Return of Employer's Property. Immediately upon the Termination Date, Executive shall deliver to Employer all copies of data, information and knowledge, including, without limitation, all notes, reference materials, sketches, diagrams, reproductions, memoranda, documentation and records incorporating or reflecting any Confidential Information, documents, correspondence, notebooks, reports, computer programs, names of full-time and part-time employees and consultants, and all other materials and copies thereof (including computer disks and other electronic media) relating in any way to the business of Employer in any way obtained by Executive during the period of his employment with Employer, along with any automobile provided by Employer for Executive's use (the "Employer's Property"). The Employer's Property shall belong exclusively to the Employer and shall be delivered to the Employer immediately upon termination of Executive's employment with the Employer, for whatever reason said termination occurs. The obligations of Executive under this Section 6 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 7. Non-competition and Non-solicitation. 7.1 Non-competition. [During the term of this Agreement and during the period for which Executive is entitled to receive compensation] after the termination of this Agreement pursuant to subparagraphs 4.3.8 or 4.4.2, regardless of whether such compensation is paid in a lump sum rather than monthly payments, Employee shall not engage, anywhere within New York State, whether directly or indirectly, as principal, owner, officer, director, agent, employee, consultant or partner, in the management of a bank holding company, commercial bank, savings bank, credit union or any other financial services provider that competes with FII, its subsidiaries or its products or programs ("Restricted Activities"), provided that the foregoing shall not restrict Executive from engaging in any Restricted Activities which Employer directs Executive to undertake or which Employer otherwise expressly authorizes. The foregoing shall not restrict Executive from owning less than 5% of the outstanding capital stock of any company which engages in Restricted Activities, provided that Executive is not otherwise involved with such company as an officer, director, agent, employee or consultant 7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing compliance with the provisions of Section 7.1, Executive may be a principal, owner, officer, director, agent, consultant or partner, of any corporation, partnership or other entity. The foregoing provisions of Section 7.1 shall not be held invalid because of the scope of the territory covered, the actions restricted thereby, or the period of time such covenant is operative. In the event of a breach or threatened breach by the Executive of Section 7.1, Employer shall be entitled to a temporary restraining order and an injunction restraining Executive from the commission of such breach. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of money damages. 7.3 Non-solicitation. During the term of this Agreement and for a two (2) year period following the Termination Date, Executive shall not, directly or indirectly, without the written 10 consent of Employer: (i) recruit or solicit for employment any employee of Employer or FII or encourage any such employee to leave their employment with Employer or FII, or (ii) solicit, induce or influence any customer, supplier, lessor or any other person or entity which has a business relationship with Employer or FII to discontinue or reduce the extent of such relationship with Employer or FII. 7.4 In the event that the Executive breaches any of the provisions of paragraphs 7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2 shall cease immediately. Executive shall have no further entitlement to receive cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have no further liability for such payments after the date of Executive's breach. 7.5 The Executive and the Employer believe that the restrictions and covenants in this section are reasonable and enforceable under the circumstances. However, if any one or more of the provisions in this section shall, for any, reason be held to be excessively broad as to time, duration, geographic scope, activity, or subject, it shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with law and with the Executive's and the Employer's intentions as stated herein. 7.6 Survival of Obligations. The obligations of Executive and Employer under this Section 7 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 8. Miscellaneous. 8.1 Remedies. Each of the parties hereto shall have all rights and remedies set forth in this Agreement. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law or any other agreement or contract to which such person is a party. Each party shall be entitled to enforce such rights specifically (without the requirement of posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Without limiting the generality of the foregoing, Executive specifically agrees that any breach or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to Employer, that money damages would not provide an adequate remedy to Employer, and that Employer shall accordingly have the right and remedy (i) to obtain an injunction prohibiting Executive from violating or threatening to violate such provisions, (ii) to have such provisions specifically enforced by any court of competent jurisdiction, and (iii) to require Executive to account for and pay over to Employer all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any transactions constituting a breach of such provisions. 8.2 Entire Agreement; Amendments and Waivers. This Agreement (including the schedule hereto) represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and can be amended, supplemented or changed, and any provision hereof can be waived, only by a written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach 11 or as a waiver of any other or subsequent breach. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 8.3 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without reference to its principles of conflicts of law. 8.4 Notices. All notices, demands, solicitations of consent or approval, and other communications hereunder shall be in writing and shall be delivered personally, mailed, sent by telefax or sent by recognized commercial courier (e.g., Federal Express). If delivered personally, such notice shall be deemed to be given when delivered to the intended recipient. If delivered by mail, such notice shall be deemed to be given five (5) days after having been deposited in the United States mail so addressed, with postage thereon prepaid. If delivered by telefax, such notice shall be deemed given when transmission of the notice is complete to the telefax number of the other party. If delivered by recognized commercial carrier, such notice shall be deemed given one (1) day after having been delivered to a recognized commercial carrier for overnight delivery. All such notices shall be addressed to the address set forth in the preamble to this Agreement or to such other address which such party shall have given to the other party for such purpose by notice hereunder. 8.5 Captions. The headings used in this Agreement are intended for reference purposes only and shall not control or affect in any manner the meaning or interpretation of any of the provisions of is Agreement. 8.6 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions of this Agreement, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. All provisions of this Agreement shall be enforced to the full extent permitted by law. 8.7 Interpretation. The parties acknowledge and agree that: (i) each party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all parties hereto, regardless of which party was generally responsible for the preparation of this Agreement. 8.8 Counterparts. This Agreement may be executed in any number of copies, each of which shall be deemed an original, and all of which together will be deemed one and the same instrument. 8.9 Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind, and inure to the benefit of the respective successors and permitted assigns of the parties hereto whether so expressed or not. 12 Neither party shall transfer or assign this Agreement or any of their rights or obligations hereunder, whether by operation of law or otherwise, without the prior written consent of the other party hereto. Any attempted transfer or assignment of this Agreement or any rights or obligations hereunder in violation of this provision shall be void ab initio. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. FINANCIAL INSTITUTIONS, INC. By: /s/James H. Wyckoff ------------------------------------------------ James H. Wyckoff Chairman Compensation Committee Financial Institutions, Inc. By: /s/ Peter G. Humphrey ----------------------------------------------- Peter G. Humphrey President & CEO EX-10 5 koelmelempl.txt EXHIBIT 10.4 EMPLOYMENT AGREEMENT/KOEHEML EX-10.4 (Exhibit 10.4) Employment Agreement-John R. Kohmel Amended 6/2001 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of the 15th day of April, 2001 between FINANCIAL INSTITUTIONS, INC. ("FII" or "Employer"), a bank holding company chartered under the laws of New York having its principal office at 220 Liberty Street, Warsaw, New York 14569 and JOHN R. KOELMEL ("Executive"), an individual residing at 5576 Oakridge Drive, Hamburg, New York, 14075. WHEREAS, Employer wishes to employ Executive in an executive capacity, as its Chief Administrative Officer, and Executive wishes to accept such employment on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants herein contained, Employer and Executive hereby agree as follows: IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. 1. Effective Date; Term. 1.1 Effective Date. This Agreement shall be effective commencing on the date hereof (the "Effective Date"). 1.2 Initial Term. Employer employs Executive, and Executive accepts such employment, for a three (3) year period commencing on the Effective Date (the "Initial Term"). 1.3 Renewal Term. This Agreement will automatically renew for successive three (3) year terms (each a "Renewal Term") upon the expiration of the Initial Term or a subsequent Renewal Term unless either party provides written notice to the other at least ninety (90) days before the end of the Initial Term or Renewal Term that such party does not intend to renew this Agreement upon the expiration thereof. 1.4 Termination. This Agreement may be terminated prior to the expiration of the Initial Term or any Renewal Term as provided in Sections 4.1 and 4.4 of this Agreement (see Early Retired Employee). 2. Scope of Employment. 2.1 Position and Duties. During the term of this Agreement, Employer shall employ Executive to serve as the Chief Administrative Officer of Employer. In such capacity, Executive shall perform such executive, administrative and operational duties as may be assigned to Executive from time to time by the Chief Executive Officer and/or Board of Directors of Employer, provided that such assignments are materially consistent with the current job description. 2.2 Exclusive Efforts. Executive agrees to serve Employer faithfully and to the best of Executive's ability and to devote Executive's entire business time, attention and efforts to the interests and business of Employer, its subsidiaries and their affiliates. 2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to and perform all his duties in accordance with applicable laws, rules and regulations and the written policies and procedures of Employer in effect from time to time. 3. Compensation, Benefits and Expenses. 3.1 Base Salary. Except as otherwise provided in this Agreement, during the period from the Effective Date through December 31, 2001 (the "First Year") Employer shall pay to Executive a base salary at a rate of $191,475 per year (the "Base Salary"). The Base Salary may be increased, in the sole discretion of Employer, in a manner comparable to other senior executives, during the remainder of the terms of this Agreement, but may not be decreased. Employer shall pay the Base Salary to Executive in equal installments pursuant to Employer's standard payroll policies and Executive's salary shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may receive bonuses as follows: 3.2.1 If the Employer meets or exceeds target performance factors pursuant to the Employer's senior management incentive compensation plan, the Executive shall be paid a bonus which shall be determined by the Compensation Committee of the Board of Directors of Employer. 3.22 The bonus earned by Executive each year during the term of this Agreement, if any, shall be paid to Executive in a lump sum promptly after the Employer's audited annual financial results are publicly disclosed. 3.2.3 Payment of any bonus shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.3 Incentive Stock Plan Benefits. During the period of his employment, Executive shall be entitled to receive grants of options under any incentive stock plan operated by FII for its employees and those of its subsidiaries, in such amounts as may be determined by the FII Board of Directors or the FII Compensation Committee, in a manner comparable to other senior executives of FII. 3.4 Fringe Benefits. During the period of his employment, Executive shall be entitled to participate in FII's plans for the welfare and benefit of its employees to the extent Executive satisfies the requirements provided in such health plans, including health standards, and other qualifications for participation. In the event Executive becomes a "Retired Early Employee" as defined in subparagraph 4.4.1, or is terminated for reasons other than those set forth in subparagraphs 4.1.3, 4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as if Executive continued to remain an employee for the remainder of the Initial Term or Renewal Term then in effect, or until Executive obtains a position offering comparable benefits, whichever occurs first. 3.5 Vacation and Holidays. During the term of this Agreement, Executive shall accrue paid vacation in accordance with Employer's policies of four (4) weeks per calendar year. Executive shall be entitled to take accrued vacation days and paid holidays in accordance with Employer's policies applicable to its employees generally. Executive may not carry forward vacation days from year to year. 3.6 Expenses. During the term of this Agreement, Employer authorizes Executive to incur reasonable and necessary out-of-pocket business expenses in the course of performing his duties and rendering services hereunder in accordance with Employer's policies with respect thereto, and Employer shall reimburse Executive for all such expenses, provided (i) such expenses and the purpose for which they were incurred, are in accordance 2 with Employer's policies, and (ii) Executive timely submits to Employer expense reports and substantiation of the expenses in accordance with Employer's policies. 3.7 Country Club Dues and Automobile Expenses. During the term of this Agreement, Employer shall reimburse Executive for monthly membership dues at a country club of Executive's choosing, and shall provide Executive with use of a suitable automobile. 4. Termination of Employment. 4.1 Events of Termination. Executive's Employment by Employer shall terminate at the expiration of the Initial Term or any Renewal Term provided timely notice is given as provided in Section 1.3 and shall terminate prior to the expiration of the then current term, if any of the following occur: 4.1.1 the death of Executive; 4.1.2 the date on which Executive is (i) determined to be "permanently disabled" as defined under the disability insurance policy covering Executive, or (ii) if Executive is not covered by any such disability policy, Executive is determined to be "totally disabled" by the Board of Directors of Employer based upon the advice of a board certified physician reasonably acceptable to Employer and Executive or his legal representative, which may include a determination that Executive is or may be unable, because of physical or mental illness or incapacity or otherwise, to fulfill his duties under this Agreement for six consecutive months 4.1.3 the commission by Executive of, or the determination by the Board of Directors, based on reasonable evidence of misconduct as presented by a law enforcement agency, or as a result of an internal or external audit or investigation, that the Executive has committed (i) a criminal offense involving the violation of state or federal law, (ii) a breach of fiduciary duty, (iii) a material act of dishonesty, fraud or misrepresentation, or (iv) any act of moral turpitude which the Board of Directors determines has or may be reasonably expected to have a material detrimental impact on Employer's business or operations, or which may prevent, because of its demonstrated or demonstrable effect on employees, regulatory agencies or customers, Executive from effectively performing his executive and other duties under this Agreement; 4.1.4 Executive materially neglects to satisfactorily perform the duties which Executive is required to perform under this Agreement or performs such duties other than in good faith, as determined by the Board of Directors. The Board will provide a written notice to the Executive, specifying the unsatisfactory performance and suggest what must be done to improve and maintain such performance. The written notice will also specify the time period (considered probationary period) given the Executive to correct such conduct. 4.1.5 the termination of Executive's employment by Employer during the term of this Agreement for any reason without cause other than pursuant to Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4; 4.1.6 Executive's resignation or retirement; or 4.1.7 the mutual consent to such termination in writing by Executive and Employer. 4.2 Time of Termination. Executive's employment with Employer shall terminate immediately upon Executive's death, upon written notice of termination from Employer or Executive upon the occurrence of an event specified in Sections 4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified in Section 4.1.4, on the date specified in the agreement terminating Executive's employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or a Renewal Term if timely notice is given pursuant to 3 Section 1.3 (as applicable, the "Termination Date"). Employer's and Employee's obligations under this Agreement shall terminate upon such termination of employment without any further action by the parties except to the extent specifically provided herein. 4.3 Effect of Termination of Employment. Following the Termination Date: 4.3.1 Executive shall return all property of Employer as provided in Section 6 of this Agreement; 4.3.2 Executive's base salary shall cease to accrue; 4.3.3 subject to Section 4.4, the Board of Directors shall pay an appropriate bonus to Executive as his bonus or other incentive compensation for the period through the Termination Date computed consistently with the manner in which Executive's bonus or incentive compensation would have been determined for such period, as defined in Section 3.2, if Executive's employment had not terminated; 4.3.4 Executive's participation in FII's benefit plans shall cease except as required by law, the terms of the plan(s) or as provided in subparagraph 3.4 of this Agreement; 4.3.5 Executive shall cease to accrue vacation days and shall be paid for unused vacation time accrued in accordance with Employer's policies applicable to employees generally; and 4.3.6 Executive shall submit any claims for reimbursement of business expenses incurred in accordance with Section 3.5 within the time period required under Employer's policies generally or Employer will not be obligated to reimburse such expenses. 4.3.7 In the case of an Early Termination, the Employer shall have no further liability to Executive hereunder, except as explicitly stated in this Agreement, other than for earned but unpaid compensation and those benefits (accrued but unpaid) to which Executive is entitled under this Agreement through the Termination Date, including termination in the cases listed in Section 3.4, continued fringe benefits as provided in such Section 3.4. Upon Termination of Employment, for any reason, all split dollar insurance policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.3.8 If, during the term of this Agreement, the Executive is terminated for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2, 4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the one year period after the Termination Date, make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Termination Date, equals the sum of (a) the Base Salary Amount paid to Executive, and (b) the annual incentive compensation earned by Executive for the most recent tax year ending before Termination Date occurred. It shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. 4.4. Change of Control and Change of Authority 4.4.1 Retired Early Employee. If a Change of Control and Change of Authority, as such terms are defined in subparagraph 4.4.7 below, occurs during the term of the Executive's employment under this 4 Employment Agreement, either the Executive, on the one hand, or Employer, on the other, may elect by written notice, given to the other party or parties, at any time within twelve (12) months after such Change of Control and Change of Authority, to terminate the employment of the Executive by Employer, whereupon the Executive will become a "Retired Early Employee," and will be entitled to receive such payments as are provided hereafter in this Section 4.4. Such election and the termination of the Executive's employment shall become effective on the first day of the second calendar month commencing after delivery of the notice or on such earlier date as the Executive in his sole discretion may specify (the "Effective Date"). 4.4.2 Cash Payments. If the Executive should become a Retired Early Employee hereunder, Employer shall, during the period commencing on the Effective Date and ending two years thereafter (the "Pay-Out Period"), make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Effective Date, equals the sum of two times the Base Salary Amount paid to Executive, as such term is defined in subparagraph 4.4.7 below, plus the sum of the annual bonus earned by Executive, for the most recent two (2) tax years ending before the date on which the Change of Control and Change of Authority occurred. The Executive shall request the method of payment, however, it shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. The payment(s) provided for in subparagraph 4.3.8 do not apply to Retired Early Employees who receive cash payment(s) pursuant to this subparagraph. If at any time during the Pay-Out Period the Compensation Committee of the Board in its sole discretion shall determine, upon application of the Retired Early Employee supported by substantial evidence, that the Retired Early Employee is then under a severe financial hardship resulting from (i) a sudden and unexpected illness or accident of the Retired Early Employee or any of his dependents (as defined in section 152(a) of the Internal Revenue Code), (ii) loss of the Retired Early Employee's property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Retired Early Employee, Employer shall make available to the Retired Early Employee, in one (1) lump sum, an amount up to but not greater than the present value of all monthly payments remaining to be paid to him in the Pay-Out Period, calculated as of the date of such determination by the Compensation Committee of the Board, for the purpose of relieving such severe financial hardship to the extent the same has not been or may not be relieved by (xi) reimbursement or compensation by insurance or otherwise, (xii) liquidation of the Retired Early Employee's assets (to the extent such liquidation would not itself cause severe financial hardship), or (xiii) distributions from other benefit plans. If (a) the lump sum amount thus made available is less than (b) the present value of all such remaining monthly payments, Employer shall continue to pay to the Retired Early Employee monthly payments for the duration of the Pay-Out Period, but from such date forward such monthly payments will be in a reduced amount such that the present value of all such reduced payments will equal the difference between (b) and (a), above. The Retired Early Employee may elect to waive any or all payments due him under this subparagraph. 4.4.3 Acceleration of Stock Options. All options and other rights that Executive may hold to purchase or otherwise acquire Common Stock of FII shall immediately become vested and exercisable in full for the total number of shares that are or might become purchasable thereunder, in each case without further condition or limitation except the giving of notice of exercise and the payment of the purchase price thereunder (but without amendment of the plan under which they were issued). At his discretion, Executive may elect to surrender to Employer his rights in any such options and rights held by him and, upon that surrender, Employer shall pay him an amount in cash equal to the aggregate spread between the exercise prices of all those options and rights and the value of the Common Stock purchasable thereunder (or of any other security into which the Common Stock has been exchanged or converted) as of the date of the termination of employment, the value to be determined by the reported last sale price of the Common Stock or that other security (or the mean between the reported last bid 5 and asked prices) on that date on NASDAQ (or, if it is not NASDAQ, on whatever may then be the principal exchange or quotation system on which the Employer's Common Stock or that other security is traded at that time). 4.4.4 Life Insurance Policies. Employer shall repay any policy loans previously taken on the Employer's insurance policies on Executive's life (provided that the directors of Employer were given written notice promptly after the making of any such loans which were made while Executive was the chief administrative officer of Employer), and then shall transfer to Executive any and all of its right, title, and interest in and to all Employer life insurance policies on Executive's life (and upon that transfer, Executive shall be deemed to have released Employer from any and all obligations it then owes to him to maintain and pay premiums on those policies, all other provisions of any agreements under which those policies were agreed to be maintained, however, to remain in effect). Upon termination of employment, all split dollar policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies before receiving all monthly payments payable to him under subparagraph 4.4.2, above, Employer shall pay to the Retired Early Employee's estate, one (1) lump sum payment in an amount equal to the present value of all such remaining unpaid monthly payments, determined as of the date of death of the Retired Early Employee. If the Retired Early Employee was receiving health insurance and dental benefits pursuant to paragraph 3.4 hereof at the time of death, Employer shall continue to provide such health insurance and dental benefits to the dependents of the deceased Retired Early Employee for the duration specified in paragraph 3.4 if the Retired Early Employee had not died. 4.4.6 Indemnification of Executive. In the event a Change of Control and Change of Authority occurs, Employer shall indemnify Executive for all reasonable legal fees and expenses subsequently incurred by Executive through legal counsel approved in advance by Employer (which approval shall not be unreasonably withheld) in seeking to obtain or enforce any right or benefit provided under this Employment Agreement, including but not limited to the rights and benefits provided under this Section 4.4 and whether or not Executive has become a Retired Early Employee hereunder, provided, however, that such right to indemnification will not apply if and to the extent that a court of competent jurisdiction shall determine that any such fees and expenses have been incurred as a result of Executive's bad faith or willful misconduct or if such a court dismisses the action seeking to enforce the right or benefit for failure to state a claim. Indemnification payments payable hereunder by Employer shall be made not later than thirty (30) days after a request for payment has been received from Executive with such evidence of indemnifiable fees and expenses as Employer may reasonably request. 4.4.7 Definitions. (i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall equal the annual compensation payable by Employer to Executive and includable by Executive in gross income for the most recent year ending before the date on which the Change of Control and Change of Authority occurred. (ii) A "Change of Control" shall be deemed to have occurred if (A) any individual corporation (other than FII), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the 6 beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more securities transactions (including gifts and stock repurchases but excluding transactions described in subdivision (B), following), of securities of FII possessing twenty percent (20%) or more of the voting power for the election of directors of such entity, (B) there shall be consummated any consolidation, merger or stock-for-stock exchange involving FII or the securities of FII in which the holders of voting securities of FII immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of FII (or, if FII does not survive such transaction voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the total voting power in an election of directors of FII (or such other surviving corporation), excluding securities received by any members of such group which represent disproportionate percentage increases in their shareholdings vis-a-vis the other members of such group, (C) "approved directors" shall constitute less than a majority of the entire Board of Directors, with "approved directors" defined to mean the members of the Board of Directors of Employer as of the date of this Agreement and any subsequently elected members who shall be nominated or approved by a majority of the approved directors on the Board prior to such election, or (D) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions, excluding any transaction described in subdivision (B), above), of all, or substantially all, of the assets of FII to a party which is not controlled by or under common control with FII. (iii) A "Change of Authority" shall be deemed to have occurred if upon the occurrence of a Change in Control, Executive, without his/her written consent, is required by Employer to accept any demotion, loss of title, or office, reduction in his annual compensation or benefits, or relocation of his principal place of employment by more than 25 miles from its location immediately prior to the Change in Control; provided, however, that Executive may consent in writing to any such demotion, loss, reduction or relocation. 5. Confidentiality; Inventions. 5.1 Confidential Information. Executive has and will have access to and participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of Employer, its subsidiaries and any affiliates (collectively, the "Companies"), including but not limited to (i) business plans, software programs, operating plans, marketing plans, financial reports, operating data, budgets, wage and salary rates, pricing strategies and information, terms of agreements with suppliers or customers and others, customer lists, reports, correspondence, tapes, disks, tangible property and specifications owned by or used in the Companies' businesses; (ii) operating strengths and weaknesses of the Companies' officers, directors, employees, agents, suppliers and customers, and/or (iii) information pertaining to future developments such as, but not limited to, research and development, software development or enhancement, future marketing plans or ideas, and plans or ideas for new services or products, (iv) all information which is learned or developed by Executive in the course and performance of his duties under this Employment Agreement, including without limitation, reports, information and data relating to the Employer's acquisition 7 strategies, and (v) other tangible and intangible property which is used in the business and operations of the Companies but not made publicly available (i) through (v) are, collectively, (the "Confidential Information"). 5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive shall not, directly or indirectly, disclose, use or make known for his or another's benefit any Confidential Information of the Companies or use such Confidential Information in any way except in the best interests of the Companies in the performance of Executive's duties under this Agreement. In addition, to the extent that Employer has entered into a confidentiality agreement with any other person or entity Executive agrees to comply with the terms of such confidentiality agreement and to be subject to the restrictions and limitations imposed by such confidentiality agreements as if he was a party thereto. 5.3 Inventions. Executive shall promptly disclose both orally and in writing to Employer all discoveries, ideas, software, developments, discoveries, designs, improvements, innovations and inventions (collectively referred to herein as "Inventions"), whether patentable or not, either relating to the existing or contemplated business, products, services, plans, processes, or procedures of Employer, or suggested by or resulting from Executive's work at Employer, or resulting wholly or in part from the use of Employer's time, material, facilities or ideas, which Executive made or conceived or may make or conceive, whether or not during working hours, alone or with others, at any time during the term of this Agreement or within one year thereafter, and Executive agrees that all such inventions shall be the exclusive property of the Employer. 5.4 Assignment of Inventions. Executive hereby assigns to Employer all his rights and interests in and to all such inventions and all patents, copyrights, trademarks or other types of intellectual property protection which may be obtained on them, in this and all foreign countries. At Employer's expense, but without charge to it, Executive agrees to execute, acknowledge and deliver to Employer any specific assignments to any such inventions or other relevant documents and to take any such further action as may be considered necessary by Employer at any time to obtain or defend letters patent in any and all countries, to obtain documents relating to registration, ownership or transfer of copyrights, to vest title in such inventions in Employer or its assigns, or to obtain for Employer any other legal protection for such inventions. 5.5 Survival of Obligations. The obligations of Executive under this Section 5 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 6. Return of Employer's Property. Immediately upon the Termination Date, Executive shall deliver to Employer all copies of data, information and knowledge, including, without limitation, all notes, reference materials, sketches, diagrams, reproductions, memoranda, documentation and records incorporating or reflecting any Confidential Information, documents, correspondence, notebooks, reports, computer programs, names of full-time and part-time employees and consultants, and all other materials and copies thereof (including computer disks and other electronic media) relating in any way to the business of Employer in any way obtained by Executive during the period of his employment with Employer, along with any automobile provided by Employer for Executive's use (the "Employer's Property"). The Employer's Property shall belong exclusively to the Employer and shall be delivered to the Employer immediately upon termination of Executive's employment with the Employer, for whatever reason said termination occurs. The obligations of Executive under this Section 6 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 7. Non-competition and Non-solicitation. 7.1 Non-competition. During the term of this Agreement and during the period for which Executive is entitled to receive compensation after the termination of this Agreement pursuant to subparagraphs 4.3.8 or 4.4.2, regardless of whether such compensation is paid in a lump sum rather than monthly payments, Employee shall 8 not engage, anywhere within New York State, whether directly or indirectly, as principal, owner, officer, director, agent, employee, consultant or partner, in the management of a bank holding company, commercial bank, savings bank, credit union or any other financial services provider that competes with FII, its subsidiaries or its products or programs ("Restricted Activities"), provided that the foregoing shall not restrict Executive from engaging in any Restricted Activities which Employer directs Executive to undertake or which Employer otherwise expressly authorizes. The foregoing shall not restrict Executive from owning less than 5% of the outstanding capital stock of any company which engages in Restricted Activities, provided that Executive is not otherwise involved with such company as an officer, director, agent, employee or consultant 7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing compliance with the provisions of Section 7.1, Executive may be a principal, owner, officer, director, agent, consultant or partner, of any corporation, partnership or other entity. The foregoing provisions of Section 7.1 shall not be held invalid because of the scope of the territory covered, the actions restricted thereby, or the period of time such covenant is operative. In the event of a breach or threatened breach by the Executive of Section 7.1, Employer shall be entitled to a temporary restraining order and an injunction restraining Executive from the commission of such breach. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of money damages. 7.3 Non-solicitation. During the term of this Agreement and for a two (2) year period following the Termination Date, Executive shall not, directly or indirectly, without the written consent of Employer: (i) recruit or solicit for employment any employee of Employer or FII or encourage any such employee to leave their employment with Employer or FII, or (ii) solicit, induce or influence any customer, supplier, lessor or any other person or entity which has a business relationship with Employer or FII to discontinue or reduce the extent of such relationship with Employer or FII. 7.4 In the event that the Executive breaches any of the provisions of paragraphs 7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2 shall cease immediately. Executive shall have no further entitlement to receive cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have no further liability for such payments after the date of Executive's breach. 7.5 The Executive and the Employer believe that the restrictions and covenants in this section are reasonable and enforceable under the circumstances. However, if any one or more of the provisions in this section shall, for any, reason be held to be excessively broad as to time, duration, geographic scope, activity, or subject, it shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with law and with the Executive's and the Employer's intentions as stated herein. 7.6 Survival of Obligations. The obligations of Executive and Employer under this Section 7 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 8. Miscellaneous. 8.1 Remedies. Each of the parties hereto shall have all rights and remedies set forth in this Agreement. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law or any other agreement or contract to which such person is a party. Each party shall be entitled to enforce such rights specifically (without the requirement of posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Without limiting the generality of the foregoing, Executive specifically agrees that any breach or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to Employer, that money damages would not provide an adequate remedy to Employer, and that Employer shall accordingly have the right and remedy (i) to obtain an injunction prohibiting 9 Executive from violating or threatening to violate such provisions, (ii) to have such provisions specifically enforced by any court of competent jurisdiction, and (iii) to require Executive to account for and pay over to Employer all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any transactions constituting a breach of such provisions. 8.2 Entire Agreement; Amendments and Waivers. This Agreement (including the schedule hereto) represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and can be amended, supplemented or changed, and any provision hereof can be waived, only by a written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 8.3 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without reference to its principles of conflicts of law. 8.4 Notices. All notices, demands, solicitations of consent or approval, and other communications hereunder shall be in writing and shall be delivered personally, mailed, sent by telefax or sent by recognized commercial courier (e.g., Federal Express). If delivered personally, such notice shall be deemed to be given when delivered to the intended recipient. If delivered by mail, such notice shall be deemed to be given five (5) days after having been deposited in the United States mail so addressed, with postage thereon prepaid. If delivered by telefax, such notice shall be deemed given when transmission of the notice is complete to the telefax number of the other party. If delivered by recognized commercial carrier, such notice shall be deemed given one (1) day after having been delivered to a recognized commercial carrier for overnight delivery. All such notices shall be addressed to the address set forth in the preamble to this Agreement or to such other address which such party shall have given to the other party for such purpose by notice hereunder. 8.5 Captions. The headings used in this Agreement are intended for reference purposes only and shall not control or affect in any manner the meaning or interpretation of any of the provisions of is Agreement. 8.6 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions of this Agreement, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. All provisions of this Agreement shall be enforced to the full extent permitted by law. 8.7 Interpretation. The parties acknowledge and agree that: (i) each party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all parties hereto, regardless of which party was generally responsible for the preparation of this Agreement. 8.8 Counterparts. This Agreement may be executed in any number of copies, each of which shall be deemed an original, and all of which together will be deemed one and the same instrument. 8.9 Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind, and inure to the benefit of the respective successors and permitted 10 assigns of the parties hereto whether so expressed or not. Neither party shall transfer or assign this Agreement or any of their rights or obligations hereunder, whether by operation of law or otherwise, without the prior written consent of the other party hereto. Any attempted transfer or assignment of this Agreement or any rights or obligations hereunder in violation of this provision shall be void ab initio. IN WITNESS WHEREOF, parties hereto have executed this Agreement on the date first above written. FINANCIAL INSTITUTIONS, INC. By:/s/Peter G. Humphrey By:/s/John R. Koelmel - ----------------------------- -------------------------------- Name: Peter G. Humphrey John R. Koelmel Title: President & CEO Sr. Vice President & CAO EX-10 6 cooperempl.txt EXHIBIT 10.5 EMPLOYMENT AGREEMENT/COOPER EX-10.5 (Exhibit 10.5) Employment Agreement-Jon J. Cooper Amended 6/2001 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of the 15th day of March, 2000, between WYOMING COUNTY BANK ("Employer"), a bank chartered under the laws of New York having its principal office at 55 North Main Street, Warsaw, New York 14569 and JON J. COOPER ("Executive"), an individual residing at 3244 Dick Road, Warsaw, New York 14569. WHEREAS, Employer wishes to employ Executive in an executive capacity, as its President, and Executive wishes to accept such employment on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants herein contained, Employer and Executive hereby agree as follows: 1. Effective Date; Term. 1.1 Effective Date. This Agreement shall be effective commencing on the date hereof (the "Effective Date"). 1.2 Initial Term. Employer employs Executive, and Executive accepts such employment, for a three (3) year period commencing on the Effective Date (the "Initial Term"). 1.3 Renewal Term. This Agreement will automatically renew for successive three year terms (each a "Renewal Term") upon the expiration of the Initial Term or a subsequent Renewal Term unless either party provides written notice to the other at least ninety (90) days before the end of the Initial Term or Renewal Term that such party does not intend to renew this Agreement upon the expiration thereof. 1.4 Termination. This Agreement may be terminated prior to the expiration of the Initial Term or any Renewal Term as provided in Sections 4.1 and 4.4 of this Agreement (see Early Retired Employee). 2. Scope of Employment. 2.1 Position and Duties. During the term of this Agreement, Employer shall employ Executive to serve as the President of Employer. In such capacity, Executive shall perform such executive, administrative and operational duties as may be assigned to Executive from time to time by the Board of Directors of Employer, provided that such assignments are materially consistent with the current job description. 2.2 Exclusive Efforts. Executive agrees to serve Employer faithfully and to the best of Executive's ability and to devote Executive's entire business time, attention and efforts to the interests and business of Employer, its subsidiaries and their affiliates. 1 2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to and perform all his duties in accordance with applicable laws, rules and regulations and the written policies and procedures of Employer in effect from time to time. 3. Compensation, Benefits and Expenses. 3.1 Base Salary. Except as otherwise provided in this Agreement, during the period from the Effective Date through December 31, 2000 (the "First Year") Employer shall pay to Executive a base salary at a rate of $164,300 per year (the "Base Salary"). The Base Salary may be increased, in the sole discretion of Employer, in a manner comparable to other senior executives, during the remainder of the terms of this Agreement, but may not be decreased. Employer shall pay the Base Salary to Executive in equal installments pursuant to Employer's standard payroll policies and Executive's salary shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may receive bonuses as follows: 3.2.1 If the Employer meets or exceeds target performance factors pursuant to the Employer's Senior Management Incentive Compensation Plan, the Executive shall be paid a bonus which shall be determined by the Compensation Committee of the Board of Directors of Employer. 3.2.2 The bonus earned by Executive each year during the term of this Agreement, if any, shall be paid to Executive in a lump sum promptly after the Employer's audited annual financial results are publicly disclosed. 3.2.3 Payment of any bonus shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.3 Incentive Stock Plan Benefits. During the period of his employment, Executive shall be entitled to receive grants of options under any incentive stock plan operated by Financial Institutions, Inc. ("FII") for its employees and those of its subsidiaries, in such amounts as may be determined by the FII Board of Directors or the FII Compensation Committee in a manner comparable to other senior executives of FII. 3.4 Fringe Benefits. During the period of his employment, Executive shall be entitled to participate in FII's plans for the welfare and benefit of its employees to the extent Executive satisfies the requirements provided in such health plans, including health standards, and other qualifications for participation. In the event Executive becomes a "Retired Early Employee" as defined in subparagraph 4.4.1, or is terminated for reasons other than those set forth in subparagraphs 4.1.3, 4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as if Executive continued to remain an employee for the remainder of the Initial Term or Renewal Term then in effect, or until Executive obtains a position offering comparable benefits, whichever occurs first. 3.5 Vacation and Holidays. During the term of this Agreement, Executive shall accrue paid vacation in accordance with Employer's policies of four (4) weeks per calendar year. Executive shall be entitled to take accrued vacation days and paid holidays in accordance with 2 Employer's policies applicable to its employees generally. Executive may not carry forward vacation days from year to year. 3.6 Expenses. During the term of this Agreement, Employer authorizes Executive to incur reasonable and necessary out-of-pocket business expenses in the course of performing his duties and rendering services hereunder in accordance with Employer's policies with respect thereto, and Employer shall reimburse Executive for all such expenses, provided (i) such expenses and the purpose for which they were incurred, are in accordance with Employer's policies, and (ii) Executive timely submits to Employer expense reports and substantiation of the expenses in accordance with Employer's policies. 3.7 Country Club Dues and Automobile Expenses. During the term of this Agreement, Employer shall reimburse Executive for monthly membership dues at a country club of Executive's choosing, and shall provide Executive with use of a suitable automobile. 4. Termination of Employment. 4.1 Events of Termination. Executive's Employment by Employer shall terminate at the expiration of the Initial Term or any Renewal Term provided timely notice is given as provided in Section 1.3 and shall terminate prior to the expiration of the then current term, if any of the following occur: 4.1.1 the death of Executive; 4.1.2 the date on which Executive is (i) determined to be "permanently disabled" as defined under the disability insurance policy covering Executive, or (ii) if Executive is not covered by any such disability policy, Executive is determined to be "totally disabled" by the Board of Directors of Employer based upon the advice of a board certified physician reasonably acceptable to Employer and Executive or his legal representative, which may include a determination that Executive is or may be unable, because of physical or mental illness or incapacity or otherwise, to fulfill his duties under this Agreement for six consecutive months 4.1.3 the commission by Executive of, or the determination by the Board of Directors, based on reasonable evidence of misconduct as presented by a law enforcement agency, or as a result of an internal or external audit or investigation, that the Executive has committed (i) a criminal offense involving the violation of state or federal law, (ii) a breach of fiduciary duty, (iii) a material act of dishonesty, fraud or misrepresentation, or (iv) any act of moral turpitude which the Board of Directors determines has or may be reasonably expected to have a material detrimental impact on Employer's business or operations, or which may prevent, because of its demonstrated or demonstrable effect on employees, regulatory agencies or customers, Executive from effectively performing his executive and other duties under this Agreement; 4.1.4 Executive materially neglects to satisfactorily perform the duties which Executive is required to perform under this Agreement or performs such duties other than in good faith, as determined by the Board of Directors. The Board will provide a written notice to the Executive, specifying the unsatisfactory performance and 3 suggest what must be done to improve and maintain such performance. The written notice will also specify the time period (considered probationary period) given the Executive to correct such conduct. 4.1.5 the termination of Executive's employment by Employer during the term of this Agreement for any reason without cause other than pursuant to Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4; 4.1.6 Executive's resignation or retirement; or 4.1.7 the mutual consent to such termination in writing by Executive and Employer. 4.2 Time of Termination. Executive's employment with Employer shall terminate immediately upon Executive's death, upon written notice of termination from Employer or Executive upon the occurrence of an event specified in Sections 4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified in Section 4.1.4, on the date specified in the agreement terminating Executive's employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or a Renewal Term if timely notice is given pursuant to Section 1.3 (as applicable, the "Termination Date"). Employer's and Employee's obligations under this Agreement shall terminate upon such termination of employment without any further action by the parties except to the extent specifically provided herein. 4.3 Effect of Termination of Employment. Following the Termination Date: 4.3.1 Executive shall return all property of Employer as provided in Section 6 of this Agreement; 4.3.2 Executive's base salary shall cease to accrue; 4.3.3 Subject to Section 4.4, the Board of Directors shall pay an appropriate bonus to Executive as his bonus or other incentive compensation for the period through the Termination Date computed consistently with the manner in which Executive's bonus or incentive compensation would have been determined for such period, as defined in Section 3.2, if Executive's employment had not terminated; 4.3.4 Executive's participation in FII's benefit plans shall cease except as required by law, the terms of the plan(s) or as provided in subparagraph 3.4 of this Agreement; 4.3.5 Executive shall cease to accrue vacation days and shall be paid for unused vacation time accrued in accordance with Employer's policies applicable to employees generally; and 4.3.6 Executive shall submit any claims for reimbursement of business expenses incurred in accordance with Section 3.5 within the time period required under Employer's policies generally or Employer will not be obligated to reimburse such expenses. 4.3.7 In the case of an Early Termination, the Employer shall have no further liability to Executive hereunder, except as explicitly stated in this Agreement, other than for earned but unpaid compensation and those benefits (accrued but unpaid) to which Executive is 4 entitled under this Agreement through the Termination Date, including termination in the cases listed in Section 3.4, continued fringe benefits as provided in such Section 3.4. Upon Termination of Employment, for any reason, all split dollar insurance policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.3.8 If, during the term of this Agreement, the Executive is terminated for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2, 4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the one year period after the Termination Date, make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Termination Date, equals the sum of (a) the Base Salary Amount paid to Executive, and (b) the annual incentive compensation earned by Executive for the most recent tax year ending before Termination Date occurred. It shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. 4.4. Change of Control and Change of Authority 4.4.1 Retired Early Employee. If a Change of Control and Change of Authority, as such terms are defined in subparagraph 4.4.7 below, occurs during the term of the Executive's employment under this Employment Agreement, either the Executive, on the one hand, or Employer, on the other, may elect by written notice, given to the other party or parties, at any time within twelve (12) months after such Change of Control and Change of Authority, to terminate the employment of the Executive by Employer, whereupon the Executive will become a "Retired Early Employee," and will be entitled to receive such payments as are provided hereafter in this Section 4.4. Such election and the termination of the Executive's employment shall become effective on the first day of the second calendar month commencing after delivery of the notice or on such earlier date as the Executive in his sole discretion may specify (the "Effective Date"). 4.4.2 Cash Payments. If the Executive should become a Retired Early Employee hereunder, Employer shall, during the period commencing on the Effective Date and ending two years thereafter (the "Pay-Out Period"), make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Effective Date, equals the sum of two times the Base Salary Amount paid to Executive, as such term is defined in subparagraph 4.4.7 below, plus the sum of the annual bonus earned by Executive, for the most recent two (2) tax years ending before the date on which the Change of Control and Change of Authority occurred. The Executive shall request the method of payment, however, it shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. The payment(s) provided for in subparagraph 4.3.8 do not apply to Retired Early Employees who receive cash payment(s) pursuant to this subparagraph. 5 If at any time during the Pay-Out Period the Compensation Committee of the Board in its sole discretion shall determine, upon application of the Retired Early Employee supported by substantial evidence, that the Retired Early Employee is then under a severe financial hardship resulting from (i) a sudden and unexpected illness or accident of the Retired Early Employee or any of his dependents (as defined in section 152(a) of the Internal Revenue Code), (ii) loss of the Retired Early Employee's property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Retired Early Employee, Employer shall make available to the Retired Early Employee, in one (1) lump sum, an amount up to but not greater than the present value of all monthly payments remaining to be paid to him in the Pay-Out Period, calculated as of the date of such determination by the Compensation Committee of the Board, for the purpose of relieving such severe financial hardship to the extent the same has not been or may not be relieved by (xi) reimbursement or compensation by insurance or otherwise, (xii) liquidation of the Retired Early Employee's assets (to the extent such liquidation would not itself cause severe financial hardship), or (xiii) distributions from other benefit plans. If (a) the lump sum amount thus made available is less than (b) the present value of all such remaining monthly payments, Employer shall continue to pay to the Retired Early Employee monthly payments for the duration of the Pay-Out Period, but from such date forward such monthly payments will be in a reduced amount such that the present value of all such reduced payments will equal the difference between (b) and (a), above. The Retired Early Employee may elect to waive any or all payments due him under this subparagraph. 4.4.3 Acceleration of Stock Options. All options and other rights that Executive may hold to purchase or otherwise acquire Common Stock of FII shall immediately become vested and exercisable in full for the total number of shares that are or might become purchasable thereunder, in each case without further condition or limitation except the giving of notice of exercise and the payment of the purchase price thereunder (but without amendment of the plan under which they were issued). At his discretion, Executive may elect to surrender to Employer his rights in any such options and rights held by him and, upon that surrender, Employer shall pay him an amount in cash equal to the aggregate spread between the exercise prices of all those options and rights and the value of the Common Stock purchasable thereunder (or of any other security into which the Common Stock has been exchanged or converted) as of the date of the termination of employment, the value to be determined by the reported last sale price of the Common Stock or that other security (or the mean between the reported last bid and asked prices) on that date on NASDAQ (or, if it is not NASDAQ, on whatever may then be the principal exchange or quotation system on which the Employer's Common Stock or that other security is traded at that time). 4.4.4 Life Insurance Policies. Employer shall repay any policy loans previously taken on the Employer's insurance policies on Executive's life (provided that the directors of Employer were given written notice promptly after the making of any such loans which were made while Executive was the president and chief executive officer of Employer), and then shall transfer to Executive any and all of its right, title, and interest in and to all Employer life insurance policies on Executive's life (and upon that transfer, Executive shall be deemed to have released Employer from any and all obligations it then owes to him to maintain and pay premiums on those policies, all other provisions of any 6 agreements under which those policies were agreed to be maintained, however, to remain in effect). Upon termination of employment, all split dollar policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies before receiving all monthly payments payable to him under subparagraph 4.4(b), above, Employer shall pay to the Retired Early Employee's estate, one (1) lump sum payment in an amount equal to the present value of all such remaining unpaid monthly payments, determined as of the date of death of the Retired Early Employee. If the Retired Early Employee was receiving health insurance and dental benefits pursuant to paragraph 3.4 hereof at the time of death, employer shall continue to provide such health insurance and dental benefits to the dependents of the deceased Retired Early Employee for the duration specified in paragraph 3.4, if the Retired Early Employee had not died. 4.4.6 Indemnification of Executive. In the event a Change of Control and Change of Authority occurs, Employer shall indemnify Executive for all reasonable legal fees and expenses subsequently incurred by Executive through legal counsel approved in advance by Employer [(which approval shall not be unreasonably withheld)] in seeking to obtain or enforce any right or benefit provided under this Employment Agreement, including but not limited to the rights and benefits provided under this Section 4.4 and whether or not Executive has become a Retired Early Employee hereunder, provided, however, that such right to indemnification will not apply if and to the extent that a court of competent jurisdiction shall determine that any such fees and expenses have been incurred as a result of Executive's bad faith or willful misconduct [or if such a court dismisses the action seeking to enforce the right or benefit for failure to state a claim]. Indemnification payments payable hereunder by Employer shall be made not later than thirty (30) days after a request for payment has been received from Executive with such evidence of indemnifiable fees and expenses as Employer may reasonably request. 4.4.7 Definitions. (i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall equal the annual compensation payable by Employer to Executive and includable by Executive in gross income for the most recent year ending before the date on which the Change of Control and Change of Authority occurred. (ii) A "Change of Control" shall be deemed to have occurred if (A) any individual corporation (other than FII), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more securities transactions (including gifts and stock repurchases but excluding transactions described in subdivision (B), 7 following), of securities of FII possessing twenty percent (20%) or more of the voting power for the election of directors of such entity, (B) there shall be consummated any consolidation, merger or stock-for-stock exchange involving FII or the securities of FII in which the holders of voting securities of FII immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of FII (or, if FII does not survive such transaction voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the total voting power in an election of directors of FII (or such other surviving corporation), excluding securities received by any members of such group which represent disproportionate percentage increases in their shareholdings vis-a-vis the other members of such group, (C) "approved directors" shall constitute less than a majority of the entire Board of Directors, with "approved directors" defined to mean the members of the Board of Directors of Employer as of the date of this Agreement and any subsequently elected members who shall be nominated or approved by a majority of the approved directors on the Board prior to such election, or (D) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions, excluding any transaction described in subdivision (B), above), of all, or substantially all, of the assets of FII to a party which is not controlled by or under common control with FII. (iii) A "Change of Authority" shall be deemed to have occurred if upon the occurrence of a Change in Control, Executive, without his/her written consent, is required by Employer to accept any demotion, loss of title, or office, reduction in his annual compensation or benefits, or relocation of his principal place of employment by more than 25 miles from its location immediately prior to the Change in Control; provided, however, that Executive may consent in writing to any such demotion, loss, reduction or relocation. 5. Confidentiality; Inventions. 5.1 Confidential Information. Executive has and will have access to and participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of Employer, its subsidiaries and any affiliates (collectively, the "Companies"), including but not limited to (i) business plans, software programs, operating plans, marketing plans, financial reports, operating data, budgets, wage and salary rates, pricing strategies and information, terms of agreements with suppliers or customers and others, customer lists, reports, correspondence, tapes, disks, tangible property and specifications owned by or used in the Companies' businesses; (ii) operating strengths and weaknesses of the Companies' officers, directors, employees, agents, suppliers and customers, and/or (iii) information pertaining to future developments such as, but not limited to, research and development, software development or enhancement, future marketing plans or ideas, and plans or ideas for new services or products, (iv) all information which is learned or developed by Executive in the 8 course and performance of his duties under this Employment Agreement, including without limitation, reports, information and data relating to the Employer's acquisition strategies, and (v) other tangible and intangible property which is used in the business and operations of the Companies but not made publicly available (i) through (v) are, collectively, (the "Confidential Information"). 5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive shall not, directly or indirectly, disclose, use or make known for his or another's benefit any Confidential Information of the Companies or use such Confidential Information in any way except in the best interests of the Companies in the performance of Executive's duties under this Agreement. In addition, to the extent that Employer has entered into a confidentiality agreement with any other person or entity Executive agrees to comply with the terms of such confidentiality agreement and to be subject to the restrictions and limitations imposed by such confidentiality agreements as if he was a party thereto. 5.3 Inventions. Executive shall promptly disclose both orally and in writing to Employer all discoveries, ideas, software, developments, discoveries, designs, improvements, innovations and inventions (collectively referred to herein as "Inventions"), whether patentable or not, either relating to the existing or contemplated business, products, services, plans, processes, or procedures of Employer, or suggested by or resulting from Executive's work at Employer, or resulting wholly or in part from the use of Employer's time, material, facilities or ideas, which Executive made or conceived or may make or conceive, whether or not during working hours, alone or with others, at any time during the term of this Agreement or within one year thereafter, and Executive agrees that all such inventions shall be the exclusive property of the Employer. 5.4 Assignment of Inventions. Executive hereby assigns to Employer all his rights and interests in and to all such inventions and all patents, copyrights, trademarks or other types of intellectual property protection which may be obtained on them, in this and all foreign countries. At Employer's expense, but without charge to it, Executive agrees to execute, acknowledge and deliver to Employer any specific assignments to any such inventions or other relevant documents and to take any such further action as may be considered necessary by Employer at any time to obtain or defend letters patent in any and all countries, to obtain documents relating to registration, ownership or transfer of copyrights, to vest title in such inventions in Employer or its assigns, or to obtain for Employer any other legal protection for such inventions. 5.5 Survival of Obligations. The obligations of Executive under this Section 5 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 6. Return of Employer's Property. Immediately upon the Termination Date, Executive shall deliver to Employer all copies of data, information and knowledge, including, without limitation, all notes, reference materials, sketches, diagrams, reproductions, memoranda, documentation and records incorporating or reflecting any Confidential Information, documents, correspondence, notebooks, reports, computer programs, names of full-time and part-time employees and consultants, and all other materials and copies thereof (including computer disks and other electronic media) relating in any way to the business of Employer in any way obtained by Executive during the period of his employment with Employer, along with any automobile 9 provided by Employer for Executive's use (the "Employer's Property"). The Employer's Property shall belong exclusively to the Employer and shall be delivered to the Employer immediately upon termination of Executive's employment with the Employer, for whatever reason said termination occurs. The obligations of Executive under this Section 6 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 7. Non-competition and Non-solicitation. 7.1 Non-competition. During the term of this Agreement and during the period for which Executive is entitled to receive compensation after the termination of this Agreement pursuant to subparagraphs 4.3.8 or 4.4.2, regardless of whether such compensation is paid in a lump sum rather than monthly payments, Employee shall not engage, anywhere within New York State, whether directly or indirectly, as principal, owner, officer, director, agent, employee, consultant or partner, in the management of a bank holding company, commercial bank, savings bank, credit union or any other financial services provider that competes with FII, its subsidiaries or its products or programs ("Restricted Activities"), provided that the foregoing shall not restrict Executive from engaging in any Restricted Activities which Employer directs Executive to undertake or which Employer otherwise expressly authorizes. The foregoing shall not restrict Executive from owning less than 5% of the outstanding capital stock of any company which engages in Restricted Activities, provided that Executive is not otherwise involved with such company as an officer, director, agent, employee or consultant 7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing compliance with the provisions of Section 7.1, Executive may be a principal, owner, officer, director, agent, consultant or partner, of any corporation, partnership or other entity. The foregoing provisions of Section 7.1 shall not be held invalid because of the scope of the territory covered, the actions restricted thereby, or the period of time such covenant is operative. In the event of a breach or threatened breach by the Executive of Section 7.1, Employer shall be entitled to a temporary restraining order and an injunction restraining Executive from the commission of such breach. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of money damages. 7.3 Non-solicitation. During the term of this Agreement and for a two (2) year period following the Termination Date, Executive shall not, directly or indirectly, without the written consent of Employer: (i) recruit or solicit for employment any employee of Employer or FII or encourage any such employee to leave their employment with Employer or FII, or (ii) solicit, induce or influence any customer, supplier, lessor or any other person or entity which has a business relationship with Employer or FII to discontinue or reduce the extent of such relationship with Employer or FII. 7.4 In the event that the Executive breaches any of the provisions of paragraphs 7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2 shall cease immediately. Executive shall have no further entitlement to receive cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have no further liability for such payments after the date of Executive's breach. 7.5 The Executive and the Employer believe that the restrictions and covenants in this section are reasonable and enforceable under the circumstances. However, if any one or more of 10 the provisions in this section shall, for any, reason be held to be excessively broad as to time, duration, geographic scope, activity, or subject, it shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with law and with the Executive's and the Employer's intentions as stated herein. 7.6 Survival of Obligations. The obligations of Executive and Employer under this Section 7 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 8. Miscellaneous. 8.1 Remedies. Each of the parties hereto shall have all rights and remedies set forth in this Agreement. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law or any other agreement or contract to which such person is a party. Each party shall be entitled to enforce such rights specifically (without the requirement of posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Without limiting the generality of the foregoing, Executive specifically agrees that any breach or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to Employer, that money damages would not provide an adequate remedy to Employer, and that Employer shall accordingly have the right and remedy (i) to obtain an injunction prohibiting Executive from violating or threatening to violate such provisions, (ii) to have such provisions specifically enforced by any court of competent jurisdiction, and (iii) to require Executive to account for and pay over to Employer all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any transactions constituting a breach of such provisions. 8.2 Entire Agreement; Amendments and Waivers. This Agreement (including the schedule hereto) represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and can be amended, supplemented or changed, and any provision hereof can be waived, only by a written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 8.3 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without reference to its principles of conflicts of law. 8.4 Notices. All notices, demands, solicitations of consent or approval, and other communications hereunder shall be in writing and shall be delivered personally, mailed, sent by telefax or sent by recognized commercial courier (e.g., Federal Express). If delivered personally, such notice shall be deemed to be given when delivered to the intended recipient. If delivered by mail, such notice shall be deemed to be given five (5) days after having been deposited in the United States mail so addressed, with postage thereon prepaid. If delivered by telefax, such notice shall be deemed given when transmission of the notice is complete to the telefax number 11 of the other party. If delivered by recognized commercial carrier, such notice shall be deemed given one (1) day after having been delivered to a recognized commercial carrier for overnight delivery. All such notices shall be addressed to the address set forth in the preamble to this Agreement or to such other address which such party shall have given to the other party for such purpose by notice hereunder. 8.5 Captions. The headings used in this Agreement are intended for reference purposes only and shall not control or affect in any manner the meaning or interpretation of any of the provisions of is Agreement. 8.6 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions of this Agreement, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. All provisions of this Agreement shall be enforced to the full extent permitted by law. 8.7 Interpretation. The parties acknowledge and agree that: (i) each party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all parties hereto, regardless of which party was generally responsible for the preparation of this Agreement. 8.8 Counterparts. This Agreement may be executed in any number of copies, each of which shall be deemed an original, and all of which together will be deemed one and the same instrument. 8.9 Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind, and inure to the benefit of the respective successors and permitted assigns of the parties hereto whether so expressed or not. Neither party shall transfer or assign this Agreement or any of their rights or obligations hereunder, whether by operation of law or otherwise, without the prior written consent of the other party hereto. Any attempted transfer or assignment of this Agreement or any rights or obligations hereunder in violation of this provision shall be void ab initio. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. WYOMING COUNTY BANK By:/s/Peter G. Humphrey By: /s/Jon J. Cooper - ----------------------------------- ------------------------------------ Peter G. Humphrey Jon J. Cooper President & CEO President & CEO Financial Institutions, Inc. EX-10 7 kimeempl.txt EXHIBIT 10.6 EMPLOYMENT AGREEMENT/KIME EX-10.6 (Exhibit 10.6) Employment Agreement-Thomas L. Kime Amended 6/2001 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of the 1st day of December, 2000, between THE NATIONAL BANK OF GENEVA ("Employer"), a bank chartered under the laws of New York having its principal office at 2 Seneca Street, Geneva, New York 14456 and THOMAS L. KIME ("Executive"), an individual residing at 3784 Kime Beach Road, Geneva, New York 14456. WHEREAS, Employer wishes to employ Executive in an executive capacity, as its President, and Executive wishes to accept such employment on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants herein contained, Employer and Executive hereby agree as follows: 1. Effective Date; Term. 1.1 Effective Date. This Agreement shall be effective commencing on the date hereof (the "Effective Date"). 1.2 Initial Term. Employer employs Executive, and Executive accepts such employment, for a three (3) year period commencing on the Effective Date (the "Initial Term"). 1.3 Renewal Term. This Agreement will automatically renew for successive three year terms (each a "Renewal Term") upon the expiration of the Initial Term or a subsequent Renewal Term unless either party provides written notice to the other at least ninety (90) days before the end of the Initial Term or Renewal Term that such party does not intend to renew this Agreement upon the expiration thereof. 1.4 Termination. This Agreement may be terminated prior to the expiration of the Initial Term or any Renewal Term as provided in Sections 4.1 and 4.4 of this Agreement (see Early Retired Employee). 2. Scope of Employment. 2.1 Position and Duties. During the term of this Agreement, Employer shall employ Executive to serve as the President of Employer. In such capacity, Executive shall perform such executive, administrative and operational duties as may be assigned to Executive from time to time by the Board of Directors of Employer, provided that such assignments are materially consistent with the current job description. 2.2 Exclusive Efforts. Executive agrees to serve Employer faithfully and to the best of Executive's ability and to devote Executive's entire business time, attention and efforts to the interests and business of Employer, its subsidiaries and their affiliates. 1 2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to and perform all his duties in accordance with applicable laws, rules and regulations and the written policies and procedures of Employer in effect from time to time. 3. Compensation, Benefits and Expenses. 3.1 Base Salary. Except as otherwise provided in this Agreement, during the period from the Effective Date through December 31, 2000 (the "First Year") Employer shall pay to Executive a base salary at a rate of $174,900 per year (the "Base Salary"). The Base Salary may be increased, in the sole discretion of Employer, in a manner comparable to other senior executives, during the remainder of the terms of this Agreement, but may not be decreased. Employer shall pay the Base Salary to Executive in equal installments pursuant to Employer's standard payroll policies and Executive's salary shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may receive bonuses as follows: 3.2.1 If the Employer meets or exceeds target performance factors pursuant to the Employer's Senior Management Incentive Compensation Plan, the Executive shall be paid a bonus which shall be determined by the Compensation Committee of the Board of Directors of Employer. 3.2.2 The bonus earned by Executive each year during the term of this Agreement, if any, shall be paid to Executive in a lump sum promptly after the Employer's audited annual financial results are publicly disclosed. 3.2.3 Payment of any bonus shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.3 Incentive Stock Plan Benefits. During the period of his employment, Executive shall be entitled to receive grants of options under any incentive stock plan operated by Financial Institutions, Inc. ("FII") for its employees and those of its subsidiaries, in such amounts as may be determined by the FII Board of Directors or the FII Compensation Committee in a manner comparable to other senior executives of FII. 3.4 Fringe Benefits. During the period of his employment, Executive shall be entitled to participate in FII's plans for the welfare and benefit of its employees to the extent Executive satisfies the requirements provided in such health plans, including health standards, and other qualifications for participation. In the event Executive becomes a "Retired Early Employee" as defined in subparagraph 4.4.1, or is terminated for reasons other than those set forth in subparagraphs 4.1.3, 4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as if Executive continued to remain an employee for the remainder of the Initial Term or Renewal Term then in effect, or until Executive obtains a position offering comparable benefits, whichever occurs first. 3.5 Vacation and Holidays. During the term of this Agreement, Executive shall accrue paid vacation in accordance with Employer's policies of four (4) weeks per calendar year. Executive shall be entitled to take accrued vacation days and paid holidays in accordance with 2 Employer's policies applicable to its employees generally. Executive may not carry forward vacation days from year to year. 3.6 Expenses. During the term of this Agreement, Employer authorizes Executive to incur reasonable and necessary out-of-pocket business expenses in the course of performing his duties and rendering services hereunder in accordance with Employer's policies with respect thereto, and Employer shall reimburse Executive for all such expenses, provided (i) such expenses and the purpose for which they were incurred, are in accordance with Employer's policies, and (ii) Executive timely submits to Employer expense reports and substantiation of the expenses in accordance with Employer's policies. 3.7 Country Club Dues and Automobile Expenses. During the term of this Agreement, Employer shall reimburse Executive for monthly membership dues at a country club of Executive's choosing, and shall provide Executive with use of a suitable automobile. 4. Termination of Employment. 4.1 Events of Termination. Executive's Employment by Employer shall terminate at the expiration of the Initial Term or any Renewal Term provided timely notice is given as provided in Section 1.3 and shall terminate prior to the expiration of the then current term, if any of the following occur: 4.1.1 the death of Executive; 4.1.2 the date on which Executive is (i) determined to be "permanently disabled" as defined under the disability insurance policy covering Executive, or (ii) if Executive is not covered by any such disability policy, Executive is determined to be "totally disabled" by the Board of Directors of Employer based upon the advice of a board certified physician reasonably acceptable to Employer and Executive or his legal representative, which may include a determination that Executive is or may be unable, because of physical or mental illness or incapacity or otherwise, to fulfill his duties under this Agreement for six consecutive months 4.1.3 the commission by Executive of, or the determination by the Board of Directors, based on reasonable evidence of misconduct as presented by a law enforcement agency, or as a result of an internal or external audit or investigation, that the Executive has committed (i) a criminal offense involving the violation of state or federal law, (ii) a breach of fiduciary duty, (iii) a material act of dishonesty, fraud or misrepresentation, or (iv) any act of moral turpitude which the Board of Directors determines has or may be reasonably expected to have a material detrimental impact on Employer's business or operations, or which may prevent, because of its demonstrated or demonstrable effect on employees, regulatory agencies or customers, Executive from effectively performing his executive and other duties under this Agreement; 4.1.4 Executive materially neglects to satisfactorily perform the duties which Executive is required to perform under this Agreement or performs such duties other than in good faith, as determined by the Board of Directors. The Board will provide a written notice to the Executive, specifying the unsatisfactory performance and 3 suggest what must be done to improve and maintain such performance. The written notice will also specify the time period (considered probationary period) given the Executive to correct such conduct. 4.1.5 the termination of Executive's employment by Employer during the term of this Agreement for any reason without cause other than pursuant to Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4; 4.1.6 Executive's resignation or retirement; or 4.1.7 the mutual consent to such termination in writing by Executive and Employer. 4.2 Time of Termination. Executive's employment with Employer shall terminate immediately upon Executive's death, upon written notice of termination from Employer or Executive upon the occurrence of an event specified in Sections 4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified in Section 4.1.4, on the date specified in the agreement terminating Executive's employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or a Renewal Term if timely notice is given pursuant to Section 1.3 (as applicable, the "Termination Date"). Employer's and Employee's obligations under this Agreement shall terminate upon such termination of employment without any further action by the parties except to the extent specifically provided herein. 4.3 Effect of Termination of Employment. Following the Termination Date: 4.3.1 Executive shall return all property of Employer as provided in Section 6 of this Agreement; 4.3.2 Executive's base salary shall cease to accrue; 4.3.3 Subject to Section 4.4, the Board of Directors shall pay an appropriate bonus to Executive as his bonus or other incentive compensation for the period through the Termination Date computed consistently with the manner in which Executive's bonus or incentive compensation would have been determined for such period, as defined in Section 3.2, if Executive's employment had not terminated; 4.3.4 Executive's participation in FII's benefit plans shall cease except as required by law, the terms of the plan(s) or as provided in subparagraph 3.4 of this Agreement; 4.3.5 Executive shall cease to accrue vacation days and shall be paid for unused vacation time accrued in accordance with Employer's policies applicable to employees generally; and 4.3.6 Executive shall submit any claims for reimbursement of business expenses incurred in accordance with Section 3.5 within the time period required under Employer's policies generally or Employer will not be obligated to reimburse such expenses. 4.3.7 In the case of an Early Termination, the Employer shall have no further liability to Executive hereunder, except as explicitly stated in this Agreement, other than for earned but unpaid compensation and those benefits (accrued but unpaid) to which Executive is 4 entitled under this Agreement through the Termination Date, including termination in the cases listed in Section 3.4, continued fringe benefits as provided in such Section 3.4. Upon Termination of Employment, for any reason, all split dollar insurance policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.3.8 If, during the term of this Agreement, the Executive is terminated for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2, 4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the one year period after the Termination Date, make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Termination Date, equals the sum of (a) the Base Salary Amount paid to Executive, and (b) the annual incentive compensation earned by Executive for the most recent tax year ending before Termination Date occurred. It shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. 4.4. Change of Control and Change of Authority 4.4.1 Retired Early Employee. If a Change of Control and Change of Authority, as such terms are defined in subparagraph 4.4.7 below, occurs during the term of the Executive's employment under this Employment Agreement, either the Executive, on the one hand, or Employer, on the other, may elect by written notice, given to the other party or parties, at any time within twelve (12) months after such Change of Control and Change of Authority, to terminate the employment of the Executive by Employer, whereupon the Executive will become a "Retired Early Employee," and will be entitled to receive such payments as are provided hereafter in this Section 4.4. Such election and the termination of the Executive's employment shall become effective on the first day of the second calendar month commencing after delivery of the notice or on such earlier date as the Executive in his sole discretion may specify (the "Effective Date"). 4.4.2 Cash Payments. If the Executive should become a Retired Early Employee hereunder, Employer shall, during the period commencing on the Effective Date and ending two years thereafter (the "Pay-Out Period"), make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Effective Date, equals the sum of two times the Base Salary Amount paid to Executive, as such term is defined in subparagraph 4.4.7 below, plus the sum of the annual bonus earned by Executive, for the most recent two (2) tax years ending before the date on which the Change of Control and Change of Authority occurred. The Executive shall request the method of payment, however, it shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. The payment(s) provided for in subparagraph 4.3.8 do not apply to Retired Early Employees who receive cash payment(s) pursuant to this subparagraph. 5 If at any time during the Pay-Out Period the Compensation Committee of the Board in its sole discretion shall determine, upon application of the Retired Early Employee supported by substantial evidence, that the Retired Early Employee is then under a severe financial hardship resulting from (i) a sudden and unexpected illness or accident of the Retired Early Employee or any of his dependents (as defined in section 152(a) of the Internal Revenue Code), (ii) loss of the Retired Early Employee's property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Retired Early Employee, Employer shall make available to the Retired Early Employee, in one (1) lump sum, an amount up to but not greater than the present value of all monthly payments remaining to be paid to him in the Pay-Out Period, calculated as of the date of such determination by the Compensation Committee of the Board, for the purpose of relieving such severe financial hardship to the extent the same has not been or may not be relieved by (xi) reimbursement or compensation by insurance or otherwise, (xii) liquidation of the Retired Early Employee's assets (to the extent such liquidation would not itself cause severe financial hardship), or (xiii) distributions from other benefit plans. If (a) the lump sum amount thus made available is less than (b) the present value of all such remaining monthly payments, Employer shall continue to pay to the Retired Early Employee monthly payments for the duration of the Pay-Out Period, but from such date forward such monthly payments will be in a reduced amount such that the present value of all such reduced payments will equal the difference between (b) and (a), above. The Retired Early Employee may elect to waive any or all payments due him under this subparagraph. 4.4.3 Acceleration of Stock Options. All options and other rights that Executive may hold to purchase or otherwise acquire Common Stock of FII shall immediately become vested and exercisable in full for the total number of shares that are or might become purchasable thereunder, in each case without further condition or limitation except the giving of notice of exercise and the payment of the purchase price thereunder (but without amendment of the plan under which they were issued). At his discretion, Executive may elect to surrender to Employer his rights in any such options and rights held by him and, upon that surrender, Employer shall pay him an amount in cash equal to the aggregate spread between the exercise prices of all those options and rights and the value of the Common Stock purchasable thereunder (or of any other security into which the Common Stock has been exchanged or converted) as of the date of the termination of employment, the value to be determined by the reported last sale price of the Common Stock or that other security (or the mean between the reported last bid and asked prices) on that date on NASDAQ (or, if it is not NASDAQ, on whatever may then be the principal exchange or quotation system on which the Employer's Common Stock or that other security is traded at that time). 4.4.4 Life Insurance Policies. Employer shall repay any policy loans previously taken on the Employer's insurance policies on Executive's life (provided that the directors of Employer were given written notice promptly after the making of any such loans which were made while Executive was the president and chief executive officer of Employer), and then shall transfer to Executive any and all of its right, title, and interest in and to all Employer life insurance policies on Executive's life (and upon that transfer, Executive shall be deemed to have released Employer from any and all obligations it then owes to him to maintain and pay premiums on those policies, all other provisions of any 6 agreements under which those policies were agreed to be maintained, however, to remain in effect). Upon termination of employment, all split dollar policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies before receiving all monthly payments payable to him under subparagraph 4.4(b), above, Employer shall pay to the Retired Early Employee's estate, one (1) lump sum payment in an amount equal to the present value of all such remaining unpaid monthly payments, determined as of the date of death of the Retired Early Employee. If the Retired Early Employee was receiving health insurance and dental benefits pursuant to paragraph 3.4 hereof at the time of death, employer shall continue to provide such health insurance and dental benefits to the dependents of the deceased Retired Early Employee for the duration specified in paragraph 3.4, if the Retired Early Employee had not died. 4.4.6 Indemnification of Executive. In the event a Change of Control and Change of Authority occurs, Employer shall indemnify Executive for all reasonable legal fees and expenses subsequently incurred by Executive through legal counsel approved in advance by Employer [(which approval shall not be unreasonably withheld)] in seeking to obtain or enforce any right or benefit provided under this Employment Agreement, including but not limited to the rights and benefits provided under this Section 4.4 and whether or not Executive has become a Retired Early Employee hereunder, provided, however, that such right to indemnification will not apply if and to the extent that a court of competent jurisdiction shall determine that any such fees and expenses have been incurred as a result of Executive's bad faith or willful misconduct [or if such a court dismisses the action seeking to enforce the right or benefit for failure to state a claim]. Indemnification payments payable hereunder by Employer shall be made not later than thirty (30) days after a request for payment has been received from Executive with such evidence of indemnifiable fees and expenses as Employer may reasonably request. 4.4.7 Definitions. (i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall equal the annual compensation payable by Employer to Executive and includable by Executive in gross income for the most recent year ending before the date on which the Change of Control and Change of Authority occurred. (ii) A "Change of Control" shall be deemed to have occurred if (A) any individual corporation (other than FII), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more securities transactions (including gifts and stock repurchases but excluding transactions described in subdivision (B), 7 following), of securities of FII possessing twenty percent (20%) or more of the voting power for the election of directors of such entity, (B) there shall be consummated any consolidation, merger or stock-for-stock exchange involving FII or the securities of FII in which the holders of voting securities of FII immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of FII (or, if FII does not survive such transaction voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the total voting power in an election of directors of FII (or such other surviving corporation), excluding securities received by any members of such group which represent disproportionate percentage increases in their shareholdings vis-a-vis the other members of such group, (C) "approved directors" shall constitute less than a majority of the entire Board of Directors, with "approved directors" defined to mean the members of the Board of Directors of Employer as of the date of this Agreement and any subsequently elected members who shall be nominated or approved by a majority of the approved directors on the Board prior to such election, or (D) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions, excluding any transaction described in subdivision (B), above), of all, or substantially all, of the assets of FII to a party which is not controlled by or under common control with FII. (iii) A "Change of Authority" shall be deemed to have occurred if upon the occurrence of a Change in Control, Executive, without his/her written consent, is required by Employer to accept any demotion, loss of title, or office, reduction in his annual compensation or benefits, or relocation of his principal place of employment by more than 25 miles from its location immediately prior to the Change in Control; provided, however, that Executive may consent in writing to any such demotion, loss, reduction or relocation. 5. Confidentiality; Inventions. 5.1 Confidential Information. Executive has and will have access to and participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of Employer, its subsidiaries and any affiliates (collectively, the "Companies"), including but not limited to (i) business plans, software programs, operating plans, marketing plans, financial reports, operating data, budgets, wage and salary rates, pricing strategies and information, terms of agreements with suppliers or customers and others, customer lists, reports, correspondence, tapes, disks, tangible property and specifications owned by or used in the Companies' businesses; (ii) operating strengths and weaknesses of the Companies' officers, directors, employees, agents, suppliers and customers, and/or (iii) information pertaining to future developments such as, but not limited to, research and development, software development or enhancement, future marketing plans or ideas, and plans or ideas for new services or products, (iv) all information which is learned or developed by Executive in the 8 course and performance of his duties under this Employment Agreement, including without limitation, reports, information and data relating to the Employer's acquisition strategies, and (v) other tangible and intangible property which is used in the business and operations of the Companies but not made publicly available (i) through (v) are, collectively, (the "Confidential Information"). 5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive shall not, directly or indirectly, disclose, use or make known for his or another's benefit any Confidential Information of the Companies or use such Confidential Information in any way except in the best interests of the Companies in the performance of Executive's duties under this Agreement. In addition, to the extent that Employer has entered into a confidentiality agreement with any other person or entity Executive agrees to comply with the terms of such confidentiality agreement and to be subject to the restrictions and limitations imposed by such confidentiality agreements as if he was a party thereto. 5.3 Inventions. Executive shall promptly disclose both orally and in writing to Employer all discoveries, ideas, software, developments, discoveries, designs, improvements, innovations and inventions (collectively referred to herein as "Inventions"), whether patentable or not, either relating to the existing or contemplated business, products, services, plans, processes, or procedures of Employer, or suggested by or resulting from Executive's work at Employer, or resulting wholly or in part from the use of Employer's time, material, facilities or ideas, which Executive made or conceived or may make or conceive, whether or not during working hours, alone or with others, at any time during the term of this Agreement or within one year thereafter, and Executive agrees that all such inventions shall be the exclusive property of the Employer. 5.4 Assignment of Inventions. Executive hereby assigns to Employer all his rights and interests in and to all such inventions and all patents, copyrights, trademarks or other types of intellectual property protection which may be obtained on them, in this and all foreign countries. At Employer's expense, but without charge to it, Executive agrees to execute, acknowledge and deliver to Employer any specific assignments to any such inventions or other relevant documents and to take any such further action as may be considered necessary by Employer at any time to obtain or defend letters patent in any and all countries, to obtain documents relating to registration, ownership or transfer of copyrights, to vest title in such inventions in Employer or its assigns, or to obtain for Employer any other legal protection for such inventions. 5.5 Survival of Obligations. The obligations of Executive under this Section 5 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 6. Return of Employer's Property. Immediately upon the Termination Date, Executive shall deliver to Employer all copies of data, information and knowledge, including, without limitation, all notes, reference materials, sketches, diagrams, reproductions, memoranda, documentation and records incorporating or reflecting any Confidential Information, documents, correspondence, notebooks, reports, computer programs, names of full-time and part-time employees and consultants, and all other materials and copies thereof (including computer disks and other electronic media) relating in any way to the business of Employer in any way obtained by Executive during the period of his employment with Employer, along with any automobile 9 provided by Employer for Executive's use (the "Employer's Property"). The Employer's Property shall belong exclusively to the Employer and shall be delivered to the Employer immediately upon termination of Executive's employment with the Employer, for whatever reason said termination occurs. The obligations of Executive under this Section 6 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 7. Non-competition and Non-solicitation. 7.1 Non-competition. During the term of this Agreement and during the period for which Executive is entitled to receive compensation after the termination of this Agreement pursuant to subparagraphs 4.3.8 or 4.4.2, regardless of whether such compensation is paid in a lump sum rather than monthly payments, Employee shall not engage, anywhere within New York State, whether directly or indirectly, as principal, owner, officer, director, agent, employee, consultant or partner, in the management of a bank holding company, commercial bank, savings bank, credit union or any other financial services provider that competes with FII, its subsidiaries or its products or programs ("Restricted Activities"), provided that the foregoing shall not restrict Executive from engaging in any Restricted Activities which Employer directs Executive to undertake or which Employer otherwise expressly authorizes. The foregoing shall not restrict Executive from owning less than 5% of the outstanding capital stock of any company which engages in Restricted Activities, provided that Executive is not otherwise involved with such company as an officer, director, agent, employee or consultant 7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing compliance with the provisions of Section 7.1, Executive may be a principal, owner, officer, director, agent, consultant or partner, of any corporation, partnership or other entity. The foregoing provisions of Section 7.1 shall not be held invalid because of the scope of the territory covered, the actions restricted thereby, or the period of time such covenant is operative. In the event of a breach or threatened breach by the Executive of Section 7.1, Employer shall be entitled to a temporary restraining order and an injunction restraining Executive from the commission of such breach. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of money damages. 7.3 Non-solicitation. During the term of this Agreement and for a two (2) year period following the Termination Date, Executive shall not, directly or indirectly, without the written consent of Employer: (i) recruit or solicit for employment any employee of Employer or FII or encourage any such employee to leave their employment with Employer or FII, or (ii) solicit, induce or influence any customer, supplier, lessor or any other person or entity which has a business relationship with Employer or FII to discontinue or reduce the extent of such relationship with Employer or FII. 7.4 In the event that the Executive breaches any of the provisions of paragraphs 7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2 shall cease immediately. Executive shall have no further entitlement to receive cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have no further liability for such payments after the date of Executive's breach. 7.5 The Executive and the Employer believe that the restrictions and covenants in this section are reasonable and enforceable under the circumstances. However, if any one or more of 10 the provisions in this section shall, for any, reason be held to be excessively broad as to time, duration, geographic scope, activity, or subject, it shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with law and with the Executive's and the Employer's intentions as stated herein. 7.6 Survival of Obligations. The obligations of Executive and Employer under this Section 7 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 8. Miscellaneous. 8.1 Remedies. Each of the parties hereto shall have all rights and remedies set forth in this Agreement. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law or any other agreement or contract to which such person is a party. Each party shall be entitled to enforce such rights specifically (without the requirement of posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Without limiting the generality of the foregoing, Executive specifically agrees that any breach or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to Employer, that money damages would not provide an adequate remedy to Employer, and that Employer shall accordingly have the right and remedy (i) to obtain an injunction prohibiting Executive from violating or threatening to violate such provisions, (ii) to have such provisions specifically enforced by any court of competent jurisdiction, and (iii) to require Executive to account for and pay over to Employer all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any transactions constituting a breach of such provisions. 8.2 Entire Agreement; Amendments and Waivers. This Agreement (including the schedule hereto) represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and can be amended, supplemented or changed, and any provision hereof can be waived, only by a written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 8.3 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without reference to its principles of conflicts of law. 8.4 Notices. All notices, demands, solicitations of consent or approval, and other communications hereunder shall be in writing and shall be delivered personally, mailed, sent by telefax or sent by recognized commercial courier (e.g., Federal Express). If delivered personally, such notice shall be deemed to be given when delivered to the intended recipient. If delivered by mail, such notice shall be deemed to be given five (5) days after having been deposited in the United States mail so addressed, with postage thereon prepaid. If delivered by telefax, such notice shall be deemed given when transmission of the notice is complete to the telefax number 11 of the other party. If delivered by recognized commercial carrier, such notice shall be deemed given one (1) day after having been delivered to a recognized commercial carrier for overnight delivery. All such notices shall be addressed to the address set forth in the preamble to this Agreement or to such other address which such party shall have given to the other party for such purpose by notice hereunder. 8.5 Captions. The headings used in this Agreement are intended for reference purposes only and shall not control or affect in any manner the meaning or interpretation of any of the provisions of is Agreement. 8.6 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions of this Agreement, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. All provisions of this Agreement shall be enforced to the full extent permitted by law. 8.7 Interpretation. The parties acknowledge and agree that: (i) each party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all parties hereto, regardless of which party was generally responsible for the preparation of this Agreement. 8.8 Counterparts. This Agreement may be executed in any number of copies, each of which shall be deemed an original, and all of which together will be deemed one and the same instrument. 8.9 Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind, and inure to the benefit of the respective successors and permitted assigns of the parties hereto whether so expressed or not. Neither party shall transfer or assign this Agreement or any of their rights or obligations hereunder, whether by operation of law or otherwise, without the prior written consent of the other party hereto. Any attempted transfer or assignment of this Agreement or any rights or obligations hereunder in violation of this provision shall be void ab initio. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. FINANCIAL INSTITUTIONS, INC. THE NATIONAL BANK OF GENEVA By: /s/Peter G. Humphrey By: /s/Thomas L. Kime - ----------------------------------- ------------------------------------ Peter G. Humphrey Thomas L. Kime President & CEO President & CEO EX-10 8 mcabeempl.txt EXHIBIT 10.7 EMPLOYMENT AGREEMENT/MCCABE EX-10.7 (Exhibit 10.7) Employment Agreement-Douglas L. McCabe Amended 6/2001 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of the 1st day of May, 2001, between BATH NATIONAL BANK ("Employer"), a bank chartered under the laws of New York having its principal office at 44 Liberty Street, Bath, New York 14810 and DOUGLAS L. MCCABE ("Executive"), an individual residing at 48 lake Street, Hammondsport, New York 14840. WHEREAS, Employer wishes to employ Executive in an executive capacity, as its President, and Executive wishes to accept such employment on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants herein contained, Employer and Executive hereby agree as follows: 1. Effective Date; Term. 1.1 Effective Date. This Agreement shall be effective commencing on the date hereof (the "Effective Date"). 1.2 Initial Term. Employer employs Executive, and Executive accepts such employment, for a three (3) year period commencing on the Effective Date (the "Initial Term"). 1.3 Renewal Term. This Agreement will automatically renew for successive three year terms (each a "Renewal Term") upon the expiration of the Initial Term or a subsequent Renewal Term unless either party provides written notice to the other at least ninety (90) days before the end of the Initial Term or Renewal Term that such party does not intend to renew this Agreement upon the expiration thereof. 1.4 Termination. This Agreement may be terminated prior to the expiration of the Initial Term or any Renewal Term as provided in Sections 4.1 and 4.4 of this Agreement (see Early Retired Employee). 2. Scope of Employment. 2.1 Position and Duties. During the term of this Agreement, Employer shall employ Executive to serve as the President of Employer. In such capacity, Executive shall perform such executive, administrative and operational duties as may be assigned to Executive from time to time by the Board of Directors of Employer, provided that such assignments are materially consistent with the current job description. 2.2 Exclusive Efforts. Executive agrees to serve Employer faithfully and to the best of Executive's ability and to devote Executive's entire business time, attention and efforts to the interests and business of Employer, its subsidiaries and their affiliates. 1 2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to and perform all his duties in accordance with applicable laws, rules and regulations and the written policies and procedures of Employer in effect from time to time. 3. Compensation, Benefits and Expenses. 3.1 Base Salary. Except as otherwise provided in this Agreement, during the period from the Effective Date through December 31, 2001 (the "First Year") Employer shall pay to Executive a base salary at a rate of $150,000 per year (the "Base Salary"). The Base Salary may be increased, in the sole discretion of Employer, in a manner comparable to other senior executives, during the remainder of the terms of this Agreement, but may not be decreased. Employer shall pay the Base Salary to Executive in equal installments pursuant to Employer's standard payroll policies and Executive's salary shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may receive bonuses as follows: 3.2.1 If the Employer meets or exceeds target performance factors pursuant to the Employer's Senior Management Incentive Compensation Plan, the Executive shall be paid a bonus which shall be determined by the Compensation Committee of the Board of Directors of Employer. 3.2.2 The bonus earned by Executive each year during the term of this Agreement, if any, shall be paid to Executive in a lump sum promptly after the Employer's audited annual financial results are publicly disclosed. 3.2.3 Payment of any bonus shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.3 Incentive Stock Plan Benefits. During the period of his employment, Executive shall be entitled to receive grants of options under any incentive stock plan operated by Financial Institutions, Inc. ("FII") for its employees and those of its subsidiaries, in such amounts as may be determined by the FII Board of Directors or the FII Compensation Committee in a manner comparable to other senior executives of FII. 3.4 Fringe Benefits. During the period of his employment, Executive shall be entitled to participate in FII's plans for the welfare and benefit of its employees to the extent Executive satisfies the requirements provided in such health plans, including health standards, and other qualifications for participation. In the event Executive becomes a "Retired Early Employee" as defined in subparagraph 4.4.1, or is terminated for reasons other than those set forth in subparagraphs 4.1.3, 4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as if Executive continued to remain an employee for the remainder of the Initial Term or Renewal Term then in effect, or until Executive obtains a position offering comparable benefits, whichever occurs first. 3.5 Vacation and Holidays. During the term of this Agreement, Executive shall accrue paid vacation in accordance with Employer's policies of four (4) weeks per calendar year. Executive shall be entitled to take accrued vacation days and paid holidays in accordance with 2 Employer's policies applicable to its employees generally. Executive may not carry forward vacation days from year to year. 3.6 Expenses. During the term of this Agreement, Employer authorizes Executive to incur reasonable and necessary out-of-pocket business expenses in the course of performing his duties and rendering services hereunder in accordance with Employer's policies with respect thereto, and Employer shall reimburse Executive for all such expenses, provided (i) such expenses and the purpose for which they were incurred, are in accordance with Employer's policies, and (ii) Executive timely submits to Employer expense reports and substantiation of the expenses in accordance with Employer's policies. 3.7 Country Club Dues and Automobile Expenses. During the term of this Agreement, Employer shall reimburse Executive for monthly membership dues at a country club of Executive's choosing, and shall provide Executive with use of a suitable automobile. 4. Termination of Employment. 4.1 Events of Termination. Executive's Employment by Employer shall terminate at the expiration of the Initial Term or any Renewal Term provided timely notice is given as provided in Section 1.3 and shall terminate prior to the expiration of the then current term, if any of the following occur: 4.1.1 the death of Executive; 4.1.2 the date on which Executive is (i) determined to be "permanently disabled" as defined under the disability insurance policy covering Executive, or (ii) if Executive is not covered by any such disability policy, Executive is determined to be "totally disabled" by the Board of Directors of Employer based upon the advice of a board certified physician reasonably acceptable to Employer and Executive or his legal representative, which may include a determination that Executive is or may be unable, because of physical or mental illness or incapacity or otherwise, to fulfill his duties under this Agreement for six consecutive months 4.1.3 the commission by Executive of, or the determination by the Board of Directors, based on reasonable evidence of misconduct as presented by a law enforcement agency, or as a result of an internal or external audit or investigation, that the Executive has committed (i) a criminal offense involving the violation of state or federal law, (ii) a breach of fiduciary duty, (iii) a material act of dishonesty, fraud or misrepresentation, or (iv) any act of moral turpitude which the Board of Directors determines has or may be reasonably expected to have a material detrimental impact on Employer's business or operations, or which may prevent, because of its demonstrated or demonstrable effect on employees, regulatory agencies or customers, Executive from effectively performing his executive and other duties under this Agreement; 4.1.4 Executive materially neglects to satisfactorily perform the duties which Executive is required to perform under this Agreement or performs such duties other than in good faith, as determined by the Board of Directors. The Board will provide a written notice to the Executive, specifying the unsatisfactory performance and 3 suggest what must be done to improve and maintain such performance. The written notice will also specify the time period (considered probationary period) given the Executive to correct such conduct. 4.1.5 the termination of Executive's employment by Employer during the term of this Agreement for any reason without cause other than pursuant to Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4; 4.1.6 Executive's resignation or retirement; or 4.1.7 the mutual consent to such termination in writing by Executive and Employer. 4.2 Time of Termination. Executive's employment with Employer shall terminate immediately upon Executive's death, upon written notice of termination from Employer or Executive upon the occurrence of an event specified in Sections 4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified in Section 4.1.4, on the date specified in the agreement terminating Executive's employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or a Renewal Term if timely notice is given pursuant to Section 1.3 (as applicable, the "Termination Date"). Employer's and Employee's obligations under this Agreement shall terminate upon such termination of employment without any further action by the parties except to the extent specifically provided herein. 4.3 Effect of Termination of Employment. Following the Termination Date: 4.3.1 Executive shall return all property of Employer as provided in Section 6 of this Agreement; 4.3.2 Executive's base salary shall cease to accrue; 4.3.3 Subject to Section 4.4, the Board of Directors shall pay an appropriate bonus to Executive as his bonus or other incentive compensation for the period through the Termination Date computed consistently with the manner in which Executive's bonus or incentive compensation would have been determined for such period, as defined in Section 3.2, if Executive's employment had not terminated; 4.3.4 Executive's participation in FII's benefit plans shall cease except as required by law, the terms of the plan(s) or as provided in subparagraph 3.4 of this Agreement; 4.3.5 Executive shall cease to accrue vacation days and shall be paid for unused vacation time accrued in accordance with Employer's policies applicable to employees generally; and 4.3.6 Executive shall submit any claims for reimbursement of business expenses incurred in accordance with Section 3.5 within the time period required under Employer's policies generally or Employer will not be obligated to reimburse such expenses. 4.3.7 In the case of an Early Termination, the Employer shall have no further liability to Executive hereunder, except as explicitly stated in this Agreement, other than for earned but unpaid compensation and those benefits (accrued but unpaid) to which Executive is 4 entitled under this Agreement through the Termination Date, including termination in the cases listed in Section 3.4, continued fringe benefits as provided in such Section 3.4. Upon Termination of Employment, for any reason, all split dollar insurance policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.3.8 If, during the term of this Agreement, the Executive is terminated for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2, 4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the one year period after the Termination Date, make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Termination Date, equals the sum of (a) the Base Salary Amount paid to Executive, and (b) the annual incentive compensation earned by Executive for the most recent tax year ending before Termination Date occurred. It shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. 4.4. Change of Control and Change of Authority 4.4.1 Retired Early Employee. If a Change of Control and Change of Authority, as such terms are defined in subparagraph 4.4.7 below, occurs during the term of the Executive's employment under this Employment Agreement, either the Executive, on the one hand, or Employer, on the other, may elect by written notice, given to the other party or parties, at any time within twelve (12) months after such Change of Control and Change of Authority, to terminate the employment of the Executive by Employer, whereupon the Executive will become a "Retired Early Employee," and will be entitled to receive such payments as are provided hereafter in this Section 4.4. Such election and the termination of the Executive's employment shall become effective on the first day of the second calendar month commencing after delivery of the notice or on such earlier date as the Executive in his sole discretion may specify (the "Effective Date"). 4.4.2 Cash Payments. If the Executive should become a Retired Early Employee hereunder, Employer shall, during the period commencing on the Effective Date and ending two years thereafter (the "Pay-Out Period"), make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Effective Date, equals the sum of two times the Base Salary Amount paid to Executive, as such term is defined in subparagraph 4.4.7 below, plus the sum of the annual bonus earned by Executive, for the most recent two (2) tax years ending before the date on which the Change of Control and Change of Authority occurred. The Executive shall request the method of payment, however, it shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. The payment(s) provided for in subparagraph 4.3.8 do not apply to Retired Early Employees who receive cash payment(s) pursuant to this subparagraph. 5 If at any time during the Pay-Out Period the Compensation Committee of the Board in its sole discretion shall determine, upon application of the Retired Early Employee supported by substantial evidence, that the Retired Early Employee is then under a severe financial hardship resulting from (i) a sudden and unexpected illness or accident of the Retired Early Employee or any of his dependents (as defined in section 152(a) of the Internal Revenue Code), (ii) loss of the Retired Early Employee's property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Retired Early Employee, Employer shall make available to the Retired Early Employee, in one (1) lump sum, an amount up to but not greater than the present value of all monthly payments remaining to be paid to him in the Pay-Out Period, calculated as of the date of such determination by the Compensation Committee of the Board, for the purpose of relieving such severe financial hardship to the extent the same has not been or may not be relieved by (xi) reimbursement or compensation by insurance or otherwise, (xii) liquidation of the Retired Early Employee's assets (to the extent such liquidation would not itself cause severe financial hardship), or (xiii) distributions from other benefit plans. If (a) the lump sum amount thus made available is less than (b) the present value of all such remaining monthly payments, Employer shall continue to pay to the Retired Early Employee monthly payments for the duration of the Pay-Out Period, but from such date forward such monthly payments will be in a reduced amount such that the present value of all such reduced payments will equal the difference between (b) and (a), above. The Retired Early Employee may elect to waive any or all payments due him under this subparagraph. 4.4.3 Acceleration of Stock Options. All options and other rights that Executive may hold to purchase or otherwise acquire Common Stock of FII shall immediately become vested and exercisable in full for the total number of shares that are or might become purchasable thereunder, in each case without further condition or limitation except the giving of notice of exercise and the payment of the purchase price thereunder (but without amendment of the plan under which they were issued). At his discretion, Executive may elect to surrender to Employer his rights in any such options and rights held by him and, upon that surrender, Employer shall pay him an amount in cash equal to the aggregate spread between the exercise prices of all those options and rights and the value of the Common Stock purchasable thereunder (or of any other security into which the Common Stock has been exchanged or converted) as of the date of the termination of employment, the value to be determined by the reported last sale price of the Common Stock or that other security (or the mean between the reported last bid and asked prices) on that date on NASDAQ (or, if it is not NASDAQ, on whatever may then be the principal exchange or quotation system on which the Employer's Common Stock or that other security is traded at that time). 4.4.4 Life Insurance Policies. Employer shall repay any policy loans previously taken on the Employer's insurance policies on Executive's life (provided that the directors of Employer were given written notice promptly after the making of any such loans which were made while Executive was the president and chief executive officer of Employer), and then shall transfer to Executive any and all of its right, title, and interest in and to all Employer life insurance policies on Executive's life (and upon that transfer, Executive shall be deemed to have released Employer from any and all obligations it then owes to him to maintain and pay premiums on those policies, all other provisions of any 6 agreements under which those policies were agreed to be maintained, however, to remain in effect). Upon termination of employment, all split dollar policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies before receiving all monthly payments payable to him under subparagraph 4.4(b), above, Employer shall pay to the Retired Early Employee's estate, one (1) lump sum payment in an amount equal to the present value of all such remaining unpaid monthly payments, determined as of the date of death of the Retired Early Employee. If the Retired Early Employee was receiving health insurance and dental benefits pursuant to paragraph 3.4 hereof at the time of death, employer shall continue to provide such health insurance and dental benefits to the dependents of the deceased Retired Early Employee for the duration specified in paragraph 3.4, if the Retired Early Employee had not died. 4.4.6 Indemnification of Executive. In the event a Change of Control and Change of Authority occurs, Employer shall indemnify Executive for all reasonable legal fees and expenses subsequently incurred by Executive through legal counsel approved in advance by Employer [(which approval shall not be unreasonably withheld)] in seeking to obtain or enforce any right or benefit provided under this Employment Agreement, including but not limited to the rights and benefits provided under this Section 4.4 and whether or not Executive has become a Retired Early Employee hereunder, provided, however, that such right to indemnification will not apply if and to the extent that a court of competent jurisdiction shall determine that any such fees and expenses have been incurred as a result of Executive's bad faith or willful misconduct [or if such a court dismisses the action seeking to enforce the right or benefit for failure to state a claim]. Indemnification payments payable hereunder by Employer shall be made not later than thirty (30) days after a request for payment has been received from Executive with such evidence of indemnifiable fees and expenses as Employer may reasonably request. 4.4.7 Definitions. (i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall equal the annual compensation payable by Employer to Executive and includable by Executive in gross income for the most recent year ending before the date on which the Change of Control and Change of Authority occurred. (ii) A "Change of Control" shall be deemed to have occurred if (A) any individual corporation (other than FII), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more securities transactions (including gifts and stock repurchases but excluding transactions described in subdivision (B), 7 following), of securities of FII possessing twenty percent (20%) or more of the voting power for the election of directors of such entity, (B) there shall be consummated any consolidation, merger or stock-for-stock exchange involving FII or the securities of FII in which the holders of voting securities of FII immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of FII (or, if FII does not survive such transaction voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the total voting power in an election of directors of FII (or such other surviving corporation), excluding securities received by any members of such group which represent disproportionate percentage increases in their shareholdings vis-a-vis the other members of such group, (C) "approved directors" shall constitute less than a majority of the entire Board of Directors, with "approved directors" defined to mean the members of the Board of Directors of Employer as of the date of this Agreement and any subsequently elected members who shall be nominated or approved by a majority of the approved directors on the Board prior to such election, or (D) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions, excluding any transaction described in subdivision (B), above), of all, or substantially all, of the assets of FII to a party which is not controlled by or under common control with FII. (iii) A "Change of Authority" shall be deemed to have occurred if upon the occurrence of a Change in Control, Executive, without his/her written consent, is required by Employer to accept any demotion, loss of title, or office, reduction in his annual compensation or benefits, or relocation of his principal place of employment by more than 25 miles from its location immediately prior to the Change in Control; provided, however, that Executive may consent in writing to any such demotion, loss, reduction or relocation. 5. Confidentiality; Inventions. 5.1 Confidential Information. Executive has and will have access to and participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of Employer, its subsidiaries and any affiliates (collectively, the "Companies"), including but not limited to (i) business plans, software programs, operating plans, marketing plans, financial reports, operating data, budgets, wage and salary rates, pricing strategies and information, terms of agreements with suppliers or customers and others, customer lists, reports, correspondence, tapes, disks, tangible property and specifications owned by or used in the Companies' businesses; (ii) operating strengths and weaknesses of the Companies' officers, directors, employees, agents, suppliers and customers, and/or (iii) information pertaining to future developments such as, but not limited to, research and development, software development or enhancement, future marketing plans or ideas, and plans or ideas for new services or products, (iv) all information which is learned or developed by Executive in 8 the course and performance of his duties under this Employment Agreement, including without limitation, reports, information and data relating to the Employer's acquisition strategies, and (v) other tangible and intangible property which is used in the business and operations of the Companies but not made publicly available (i) through (v) are, collectively, (the "Confidential Information"). 5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive shall not, directly or indirectly, disclose, use or make known for his or another's benefit any Confidential Information of the Companies or use such Confidential Information in any way except in the best interests of the Companies in the performance of Executive's duties under this Agreement. In addition, to the extent that Employer has entered into a confidentiality agreement with any other person or entity Executive agrees to comply with the terms of such confidentiality agreement and to be subject to the restrictions and limitations imposed by such confidentiality agreements as if he was a party thereto. 5.3 Inventions. Executive shall promptly disclose both orally and in writing to Employer all discoveries, ideas, software, developments, discoveries, designs, improvements, innovations and inventions (collectively referred to herein as "Inventions"), whether patentable or not, either relating to the existing or contemplated business, products, services, plans, processes, or procedures of Employer, or suggested by or resulting from Executive's work at Employer, or resulting wholly or in part from the use of Employer's time, material, facilities or ideas, which Executive made or conceived or may make or conceive, whether or not during working hours, alone or with others, at any time during the term of this Agreement or within one year thereafter, and Executive agrees that all such inventions shall be the exclusive property of the Employer. 5.4 Assignment of Inventions. Executive hereby assigns to Employer all his rights and interests in and to all such inventions and all patents, copyrights, trademarks or other types of intellectual property protection which may be obtained on them, in this and all foreign countries. At Employer's expense, but without charge to it, Executive agrees to execute, acknowledge and deliver to Employer any specific assignments to any such inventions or other relevant documents and to take any such further action as may be considered necessary by Employer at any time to obtain or defend letters patent in any and all countries, to obtain documents relating to registration, ownership or transfer of copyrights, to vest title in such inventions in Employer or its assigns, or to obtain for Employer any other legal protection for such inventions. 5.5 Survival of Obligations. The obligations of Executive under this Section 5 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 6. Return of Employer's Property. Immediately upon the Termination Date, Executive shall deliver to Employer all copies of data, information and knowledge, including, without limitation, all notes, reference materials, sketches, diagrams, reproductions, memoranda, documentation and records incorporating or reflecting any Confidential Information, documents, correspondence, notebooks, reports, computer programs, names of full-time and part-time employees and consultants, and all other materials and copies thereof (including computer disks and other electronic media) relating in any way to the business of Employer in any way obtained by Executive during the period of his employment with Employer, along with any automobile 9 provided by Employer for Executive's use (the "Employer's Property"). The Employer's Property shall belong exclusively to the Employer and shall be delivered to the Employer immediately upon termination of Executive's employment with the Employer, for whatever reason said termination occurs. The obligations of Executive under this Section 6 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 7. Non-competition and Non-solicitation. 7.1 Non-competition. During the term of this Agreement and during the period for which Executive is entitled to receive compensation after the termination of this Agreement pursuant to subparagraphs 4.3.8 or 4.4.2, regardless of whether such compensation is paid in a lump sum rather than monthly payments, Employee shall not engage, anywhere within New York State, whether directly or indirectly, as principal, owner, officer, director, agent, employee, consultant or partner, in the management of a bank holding company, commercial bank, savings bank, credit union or any other financial services provider that competes with FII, its subsidiaries or its products or programs ("Restricted Activities"), provided that the foregoing shall not restrict Executive from engaging in any Restricted Activities which Employer directs Executive to undertake or which Employer otherwise expressly authorizes. The foregoing shall not restrict Executive from owning less than 5% of the outstanding capital stock of any company which engages in Restricted Activities, provided that Executive is not otherwise involved with such company as an officer, director, agent, employee or consultant 7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing compliance with the provisions of Section 7.1, Executive may be a principal, owner, officer, director, agent, consultant or partner, of any corporation, partnership or other entity. The foregoing provisions of Section 7.1 shall not be held invalid because of the scope of the territory covered, the actions restricted thereby, or the period of time such covenant is operative. In the event of a breach or threatened breach by the Executive of Section 7.1, Employer shall be entitled to a temporary restraining order and an injunction restraining Executive from the commission of such breach. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of money damages. 7.3 Non-solicitation. During the term of this Agreement and for a two (2) year period following the Termination Date, Executive shall not, directly or indirectly, without the written consent of Employer: (i) recruit or solicit for employment any employee of Employer or FII or encourage any such employee to leave their employment with Employer or FII, or (ii) solicit, induce or influence any customer, supplier, lessor or any other person or entity which has a business relationship with Employer or FII to discontinue or reduce the extent of such relationship with Employer or FII. 7.4 In the event that the Executive breaches any of the provisions of paragraphs 7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2 shall cease immediately. Executive shall have no further entitlement to receive cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have no further liability for such payments after the date of Executive's breach. 7.5 The Executive and the Employer believe that the restrictions and covenants in this section are reasonable and enforceable under the circumstances. However, if any one or more of 10 the provisions in this section shall, for any, reason be held to be excessively broad as to time, duration, geographic scope, activity, or subject, it shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with law and with the Executive's and the Employer's intentions as stated herein. 7.6 Survival of Obligations. The obligations of Executive and Employer under this Section 7 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 8. Miscellaneous. 8.1 Remedies. Each of the parties hereto shall have all rights and remedies set forth in this Agreement. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law or any other agreement or contract to which such person is a party. Each party shall be entitled to enforce such rights specifically (without the requirement of posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Without limiting the generality of the foregoing, Executive specifically agrees that any breach or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to Employer, that money damages would not provide an adequate remedy to Employer, and that Employer shall accordingly have the right and remedy (i) to obtain an injunction prohibiting Executive from violating or threatening to violate such provisions, (ii) to have such provisions specifically enforced by any court of competent jurisdiction, and (iii) to require Executive to account for and pay over to Employer all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any transactions constituting a breach of such provisions. 8.2 Entire Agreement; Amendments and Waivers. This Agreement (including the schedule hereto) represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and can be amended, supplemented or changed, and any provision hereof can be waived, only by a written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 8.3 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without reference to its principles of conflicts of law. 8.4 Notices. All notices, demands, solicitations of consent or approval, and other communications hereunder shall be in writing and shall be delivered personally, mailed, sent by telefax or sent by recognized commercial courier (e.g., Federal Express). If delivered personally, such notice shall be deemed to be given when delivered to the intended recipient. If delivered by mail, such notice shall be deemed to be given five (5) days after having been deposited in the United States mail so addressed, with postage thereon prepaid. If delivered by telefax, such notice shall be deemed given when transmission of the notice is complete to the telefax number 11 of the other party. If delivered by recognized commercial carrier, such notice shall be deemed given one (1) day after having been delivered to a recognized commercial carrier for overnight delivery. All such notices shall be addressed to the address set forth in the preamble to this Agreement or to such other address which such party shall have given to the other party for such purpose by notice hereunder. 8.5 Captions. The headings used in this Agreement are intended for reference purposes only and shall not control or affect in any manner the meaning or interpretation of any of the provisions of is Agreement. 8.6 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions of this Agreement, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. All provisions of this Agreement shall be enforced to the full extent permitted by law. 8.7 Interpretation. The parties acknowledge and agree that: (i) each party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all parties hereto, regardless of which party was generally responsible for the preparation of this Agreement. 8.8 Counterparts. This Agreement may be executed in any number of copies, each of which shall be deemed an original, and all of which together will be deemed one and the same instrument. 8.9 Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind, and inure to the benefit of the respective successors and permitted assigns of the parties hereto whether so expressed or not. Neither party shall transfer or assign this Agreement or any of their rights or obligations hereunder, whether by operation of law or otherwise, without the prior written consent of the other party hereto. Any attempted transfer or assignment of this Agreement or any rights or obligations hereunder in violation of this provision shall be void ab initio. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. FINANCIAL INSTITUTIONS, INC. BATH NATIONAL BANK By: /s/Peter G. Humphrey By: /s/Douglas L. McCabe - ---------------------------------- ------------------------------------- Peter G. Humphrey Douglas L. McCabe President & CEO President & CEO EX-10 9 brownempl.txt EXHIBIT 10.8 EMPLOYMENT AGREEMENT/BROWN EX-10.8 (Exhibit 10.8) Employment Agreement-Randolph C. Brown Amended 6/2001 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of the 15th day of March, 2000, between FIRST TIER BANK & TRUST ("Employer"), a bank chartered under the laws of New York having its principal office at 124 West State Street, Olean, New York 14760 and RANDOLPH C. BROWN ("Executive"), an individual residing at 114 Bradley Drive, Olean, New York 14760. WHEREAS, Employer wishes to employ Executive in an executive capacity, as its President, and Executive wishes to accept such employment on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants herein contained, Employer and Executive hereby agree as follows: 1. Effective Date; Term. 1.1 Effective Date. This Agreement shall be effective commencing on the date hereof (the "Effective Date"). 1.2 Initial Term. Employer employs Executive, and Executive accepts such employment, for a three (3) year period commencing on the Effective Date (the "Initial Term"). 1.3 Renewal Term. This Agreement will automatically renew for successive three year terms (each a "Renewal Term") upon the expiration of the Initial Term or a subsequent Renewal Term unless either party provides written notice to the other at least ninety (90) days before the end of the Initial Term or Renewal Term that such party does not intend to renew this Agreement upon the expiration thereof. 1.4 Termination. This Agreement may be terminated prior to the expiration of the Initial Term or any Renewal Term as provided in Sections 4.1 and 4.4 of this Agreement (see Early Retired Employee). 2. Scope of Employment. 2.1 Position and Duties. During the term of this Agreement, Employer shall employ Executive to serve as the President of Employer. In such capacity, Executive shall perform such executive, administrative and operational duties as may be assigned to Executive from time to time by the Board of Directors of Employer, provided that such assignments are materially consistent with the current job description. 2.2 Exclusive Efforts. Executive agrees to serve Employer faithfully and to the best of Executive's ability and to devote Executive's entire business time, attention and efforts to the interests and business of Employer, its subsidiaries and their affiliates. 2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to and perform all his duties in accordance with applicable laws, rules and regulations and the written policies and procedures of Employer in effect from time to time. 1 3. Compensation, Benefits and Expenses. 3.1 Base Salary. Except as otherwise provided in this Agreement, during the period from the Effective Date through December 31, 2000 (the "First Year") Employer shall pay to Executive a base salary at a rate of $114,450 per year (the "Base Salary"). The Base Salary may be increased, in the sole discretion of Employer, in a manner comparable to other senior executives, during the remainder of the terms of this Agreement, but may not be decreased. Employer shall pay the Base Salary to Executive in equal installments pursuant to Employer's standard payroll policies and Executive's salary shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may receive bonuses as follows: 3.2.1 If the Employer meets or exceeds target performance factors pursuant to the Employer's Senior Management Incentive Compensation Plan, the Executive shall be paid a bonus which shall be determined by the Compensation Committee of the Board of Directors of Employer. 3.2.2 The bonus earned by Executive each year during the term of this Agreement, if any, shall be paid to Executive in a lump sum promptly after the Employer's audited annual financial results are publicly disclosed. 3.2.3 Payment of any bonus shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.3 Incentive Stock Plan Benefits. During the period of his employment, Executive shall be entitled to receive grants of options under any incentive stock plan operated by Financial Institutions, Inc. ("FII") for its employees and those of its subsidiaries, in such amounts as may be determined by the FII Board of Directors or the FII Compensation Committee in a manner comparable to other senior executives of FII. 3.4 Fringe Benefits. During the period of his employment, Executive shall be entitled to participate in FII's plans for the welfare and benefit of its employees to the extent Executive satisfies the requirements provided in such health plans, including health standards, and other qualifications for participation. In the event Executive becomes a "Retired Early Employee" as defined in subparagraph 4.4.1, or is terminated for reasons other than those set forth in subparagraphs 4.1.3, 4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as if Executive continued to remain an employee for the remainder of the Initial Term or Renewal Term then in effect, or until Executive obtains a position offering comparable benefits, whichever occurs first. 3.5 Vacation and Holidays. During the term of this Agreement, Executive shall accrue paid vacation in accordance with Employer's policies of four (4) weeks per calendar year. Executive shall be entitled to take accrued vacation days and paid holidays in accordance with Employer's policies applicable to its employees generally. Executive may not carry forward vacation days from year to year. 3.6 Expenses. During the term of this Agreement, Employer authorizes Executive to incur reasonable and necessary out-of-pocket business expenses in the course of performing his duties and rendering services hereunder in accordance with Employer's policies with respect thereto, and Employer shall reimburse Executive for all such expenses, provided (i) such expenses and the purpose for which they were incurred, are in accordance with Employer's policies, and (ii) Executive timely submits to Employer expense reports and substantiation of the expenses in accordance with Employer's policies. 3.7 Country Club Dues and Automobile Expenses. During the term of this Agreement, Employer shall reimburse Executive for monthly membership dues at a country club of Executive's choosing, and shall provide Executive with use of a suitable automobile. 2 4. Termination of Employment. 4.1 Events of Termination. Executive's Employment by Employer shall terminate at the expiration of the Initial Term or any Renewal Term provided timely notice is given as provided in Section 1.3 and shall terminate prior to the expiration of the then current term, if any of the following occur: 4.1.1 the death of Executive; 4.1.2 the date on which Executive is (i) determined to be "permanently disabled" as defined under the disability insurance policy covering Executive, or (ii) if Executive is not covered by any such disability policy, Executive is determined to be "totally disabled" by the Board of Directors of Employer based upon the advice of a board certified physician reasonably acceptable to Employer and Executive or his legal representative, which may include a determination that Executive is or may be unable, because of physical or mental illness or incapacity or otherwise, to fulfill his duties under this Agreement for six consecutive months 4.1.3 the commission by Executive of, or the determination by the Board of Directors, based on reasonable evidence of misconduct as presented by a law enforcement agency, or as a result of an internal or external audit or investigation, that the Executive has committed (i) a criminal offense involving the violation of state or federal law, (ii) a breach of fiduciary duty, (iii) a material act of dishonesty, fraud or misrepresentation, or (iv) any act of moral turpitude which the Board of Directors determines has or may be reasonably expected to have a material detrimental impact on Employer's business or operations, or which may prevent, because of its demonstrated or demonstrable effect on employees, regulatory agencies or customers, Executive from effectively performing his executive and other duties under this Agreement; 4.1.4 Executive materially neglects to satisfactorily perform the duties which Executive is required to perform under this Agreement or performs such duties other than in good faith, as determined by the Board of Directors. The Board will provide a written notice to the Executive, specifying the unsatisfactory performance and suggest what must be done to improve and maintain such performance. The written notice will also specify the time period (considered probationary period) given the Executive to correct such conduct. 4.1.5 the termination of Executive's employment by Employer during the term of this Agreement for any reason without cause other than pursuant to Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4; 4.1.6 Executive's resignation or retirement; or 4.1.7 the mutual consent to such termination in writing by Executive and Employer. 4.2 Time of Termination. Executive's employment with Employer shall terminate immediately upon Executive's death, upon written notice of termination from Employer or Executive upon the occurrence of an event specified in Sections 4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified in Section 4.1.4, on the date specified in the agreement terminating Executive's employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or a Renewal Term if timely notice is given pursuant to Section 1.3 (as applicable, the "Termination Date"). Employer's and Employee's obligations under this Agreement shall terminate upon such termination of employment without any further action by the parties except to the extent specifically provided herein. 3 4.3 Effect of Termination of Employment. Following the Termination Date: 4.3.1 Executive shall return all property of Employer as provided in Section 6 of this Agreement; 4.3.2 Executive's base salary shall cease to accrue; 4.3.3 Subject to Section 4.4, the Board of Directors shall pay an appropriate bonus to Executive as his bonus or other incentive compensation for the period through the Termination Date computed consistently with the manner in which Executive's bonus or incentive compensation would have been determined for such period, as defined in Section 3.2, if Executive's employment had not terminated; 4.3.4 Executive's participation in FII's benefit plans shall cease except as required by law, the terms of the plan(s) or as provided in subparagraph 3.4 of this Agreement; 4.3.5 Executive shall cease to accrue vacation days and shall be paid for unused vacation time accrued in accordance with Employer's policies applicable to employees generally; and 4.3.6 Executive shall submit any claims for reimbursement of business expenses incurred in accordance with Section 3.5 within the time period required under Employer's policies generally or Employer will not be obligated to reimburse such expenses. 4.3.7 In the case of an Early Termination, the Employer shall have no further liability to Executive hereunder, except as explicitly stated in this Agreement, other than for earned but unpaid compensation and those benefits (accrued but unpaid) to which Executive is entitled under this Agreement through the Termination Date, including termination in the cases listed in Section 3.4, continued fringe benefits as provided in such Section 3.4. Upon Termination of Employment, for any reason, all split dollar insurance policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.3.8 If, during the term of this Agreement, the Executive is terminated for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2, 4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the one year period after the Termination Date, make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Termination Date, equals the sum of (a) the Base Salary Amount paid to Executive, and (b) the annual incentive compensation earned by Executive for the most recent tax year ending before Termination Date occurred. It shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. 4.4 Change of Control and Change of Authority 4.4.1 Retired Early Employee. If a Change of Control and Change of Authority, as such terms are defined in subparagraph 4.4.7 below, occurs during the term of the Executive's employment under this Employment Agreement, either the Executive, on the one hand, or Employer, on the other, may elect by written notice, given to the other party or parties, at any time within twelve (12) months after such Change of Control and Change of Authority, to terminate the employment of the Executive by Employer, whereupon the Executive will become a "Retired Early Employee," and will be entitled to receive such payments as are provided hereafter in this Section 4.4. Such election and the termination of the Executive's employment shall become effective on the first day 4 of the second calendar month commencing after delivery of the notice or on such earlier date as the Executive in his sole discretion may specify (the "Effective Date"). 4.4.2 Cash Payments. If the Executive should become a Retired Early Employee hereunder, Employer shall, during the period commencing on the Effective Date and ending two years thereafter (the "Pay-Out Period"), make equal monthly payments or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Effective Date, equals the sum of two times the Base Salary Amount paid to Executive, as such term is defined in subparagraph 4.4.7 below, plus the sum of the annual bonus earned by Executive, for the most recent two (2) tax years ending before the date on which the Change of Control and Change of Authority occurred. The Executive shall request the method of payment, however, it shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. The payment(s) provided for in subparagraph 4.3.8 do not apply to Retired Early Employees who receive cash payment(s) pursuant to this subparagraph. If at any time during the Pay-Out Period the Compensation Committee of the Board in its sole discretion shall determine, upon application of the Retired Early Employee supported by substantial evidence, that the Retired Early Employee is then under a severe financial hardship resulting from (i) a sudden and unexpected illness or accident of the Retired Early Employee or any of his dependents (as defined in section 152(a) of the Internal Revenue Code), (ii) loss of the Retired Early Employee's property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Retired Early Employee, Employer shall make available to the Retired Early Employee, in one (1) lump sum, an amount up to but not greater than the present value of all monthly payments remaining to be paid to him in the Pay-Out Period, calculated as of the date of such determination by the Compensation Committee of the Board, for the purpose of relieving such severe financial hardship to the extent the same has not been or may not be relieved by (xi) reimbursement or compensation by insurance or otherwise, (xii) liquidation of the Retired Early Employee's assets (to the extent such liquidation would not itself cause severe financial hardship), or (xiii) distributions from other benefit plans. If (a) the lump sum amount thus made available is less than (b) the present value of all such remaining monthly payments, Employer shall continue to pay to the Retired Early Employee monthly payments for the duration of the Pay-Out Period, but from such date forward such monthly payments will be in a reduced amount such that the present value of all such reduced payments will equal the difference between (b) and (a), above. The Retired Early Employee may elect to waive any or all payments due him under this subparagraph. 4.4.3 Acceleration of Stock Options. All options and other rights that Executive may hold to purchase or otherwise acquire Common Stock of FII shall immediately become vested and exercisable in full for the total number of shares that are or might become purchasable thereunder, in each case without further condition or limitation except the giving of notice of exercise and the payment of the purchase price thereunder (but without amendment of the plan under which they were issued). At his discretion, Executive may elect to surrender to Employer his rights in any such options and rights held by him and, upon that surrender, Employer shall pay him an amount in cash equal to the aggregate spread between the exercise prices of all those options and rights and the value of the Common Stock purchasable thereunder (or of any other security into which the Common Stock has been exchanged or converted) as of the date of the termination of employment, the value to be determined by the reported last sale price of the Common Stock or that other security (or the mean between the reported last bid and asked prices) on that date on NASDAQ (or, if it is not NASDAQ, on whatever may then be the principal exchange or quotation system on which the Employer's Common Stock or that other security is traded at that time). 5 4.4.4 Life Insurance Policies. Employer shall repay any policy loans previously taken on the Employer's insurance policies on Executive's life (provided that the directors of Employer were given written notice promptly after the making of any such loans which were made while Executive was the president and chief executive officer of Employer), and then shall transfer to Executive any and all of its right, title, and interest in and to all Employer life insurance policies on Executive's life (and upon that transfer, Executive shall be deemed to have released Employer from any and all obligations it then owes to him to maintain and pay premiums on those policies, all other provisions of any agreements under which those policies were agreed to be maintained, however, to remain in effect). Upon termination of employment, all split dollar policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies before receiving all monthly payments payable to him under subparagraph 4.4(b), above, Employer shall pay to the Retired Early Employee's estate, one (1) lump sum payment in an amount equal to the present value of all such remaining unpaid monthly payments, determined as of the date of death of the Retired Early Employee. If the Retired Early Employee was receiving health insurance and dental benefits pursuant to paragraph 3.4 hereof at the time of death, employer shall continue to provide such health insurance and dental benefits to the dependents of the deceased Retired Early Employee for the duration specified in paragraph 3.4, if the Retired Early Employee had not died. 4.4.6 Indemnification of Executive. In the event a Change of Control and Change of Authority occurs, Employer shall indemnify Executive for all reasonable legal fees and expenses subsequently incurred by Executive through legal counsel approved in advance by Employer [(which approval shall not be unreasonably withheld)] in seeking to obtain or enforce any right or benefit provided under this Employment Agreement, including but not limited to the rights and benefits provided under this Section 4.4 and whether or not Executive has become a Retired Early Employee hereunder, provided, however, that such right to indemnification will not apply if and to the extent that a court of competent jurisdiction shall determine that any such fees and expenses have been incurred as a result of Executive's bad faith or willful misconduct [or if such a court dismisses the action seeking to enforce the right or benefit for failure to state a claim]. Indemnification payments payable hereunder by Employer shall be made not later than thirty (30) days after a request for payment has been received from Executive with such evidence of indemnifiable fees and expenses as Employer may reasonably request. 4.4.7 Definitions. (i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall equal the annual compensation payable by Employer to Executive and includable by Executive in gross income for the most recent year ending before the date on which the Change of Control and Change of Authority occurred. (ii) A "Change of Control" shall be deemed to have occurred if (A) any individual corporation (other than FII), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more securities transactions (including gifts and stock repurchases but excluding transactions described in subdivision (B), following), of securities of FII possessing twenty percent (20%) or more of the voting power for the election of directors of such entity, 6 (B) there shall be consummated any consolidation, merger or stock-for-stock exchange involving FII or the securities of FII in which the holders of voting securities of FII immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of FII (or, if FII does not survive such transaction voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the total voting power in an election of directors of FII (or such other surviving corporation), excluding securities received by any members of such group which represent disproportionate percentage increases in their shareholdings vis-a-vis the other members of such group, (C) "approved directors" shall constitute less than a majority of the entire Board of Directors, with "approved directors" defined to mean the members of the Board of Directors of Employer as of the date of this Agreement and any subsequently elected members who shall be nominated or approved by a majority of the approved directors on the Board prior to such election, or (D) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions, excluding any transaction described in subdivision (B), above), of all, or substantially all, of the assets of FII to a party which is not controlled by or under common control with FII. (iii) A "Change of Authority" shall be deemed to have occurred if upon the occurrence of a Change in Control, Executive, without his/her written consent, is required by Employer to accept any demotion, loss of title, or office, reduction in his annual compensation or benefits, or relocation of his principal place of employment by more than 25 miles from its location immediately prior to the Change in Control; provided, however, that Executive may consent in writing to any such demotion, loss, reduction or relocation. 5. Confidentiality; Inventions. 5.1 Confidential Information. Executive has and will have access to and participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of Employer, its subsidiaries and any affiliates (collectively, the "Companies"), including but not limited to (i) business plans, software programs, operating plans, marketing plans, financial reports, operating data, budgets, wage and salary rates, pricing strategies and information, terms of agreements with suppliers or customers and others, customer lists, reports, correspondence, tapes, disks, tangible property and specifications owned by or used in the Companies' businesses; (ii) operating strengths and weaknesses of the Companies' officers, directors, employees, agents, suppliers and customers, and/or (iii) information pertaining to future developments such as, but not limited to, research and development, software development or enhancement, future marketing plans or ideas, and plans or ideas for new services or products, (iv) all information which is learned or developed by Executive in the course and performance of his duties under this Employment Agreement, including without limitation, reports, information and data relating to the Employer's acquisition strategies, and (v) other tangible and intangible property which is used in the business and operations of the Companies but not made publicly available (i) through (v) are, collectively, (the "Confidential Information"). 5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive shall not, directly or indirectly, disclose, use or make known for his or another's benefit any Confidential Information of the Companies or use such Confidential Information in any way except in the best interests of the Companies in the performance of Executive's duties under this Agreement. In addition, to the extent that Employer has entered into a confidentiality agreement with any other person or entity Executive agrees to comply with the terms of such confidentiality agreement and to be subject to the restrictions and limitations imposed by such confidentiality agreements as if he was a party thereto. 7 5.3 Inventions. Executive shall promptly disclose both orally and in writing to Employer all discoveries, ideas, software, developments, discoveries, designs, improvements, innovations and inventions (collectively referred to herein as "Inventions"), whether patentable or not, either relating to the existing or contemplated business, products, services, plans, processes, or procedures of Employer, or suggested by or resulting from Executive's work at Employer, or resulting wholly or in part from the use of Employer's time, material, facilities or ideas, which Executive made or conceived or may make or conceive, whether or not during working hours, alone or with others, at any time during the term of this Agreement or within one year thereafter, and Executive agrees that all such inventions shall be the exclusive property of the Employer. 5.4 Assignment of Inventions. Executive hereby assigns to Employer all his rights and interests in and to all such inventions and all patents, copyrights, trademarks or other types of intellectual property protection which may be obtained on them, in this and all foreign countries. At Employer's expense, but without charge to it, Executive agrees to execute, acknowledge and deliver to Employer any specific assignments to any such inventions or other relevant documents and to take any such further action as may be considered necessary by Employer at any time to obtain or defend letters patent in any and all countries, to obtain documents relating to registration, ownership or transfer of copyrights, to vest title in such inventions in Employer or its assigns, or to obtain for Employer any other legal protection for such inventions. 5.5 Survival of Obligations. The obligations of Executive under this Section 5 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 6. Return of Employer's Property. Immediately upon the Termination Date, Executive shall deliver to Employer all copies of data, information and knowledge, including, without limitation, all notes, reference materials, sketches, diagrams, reproductions, memoranda, documentation and records incorporating or reflecting any Confidential Information, documents, correspondence, notebooks, reports, computer programs, names of full-time and part-time employees and consultants, and all other materials and copies thereof (including computer disks and other electronic media) relating in any way to the business of Employer in any way obtained by Executive during the period of his employment with Employer, along with any automobile provided by Employer for Executive's use (the "Employer's Property"). The Employer's Property shall belong exclusively to the Employer and shall be delivered to the Employer immediately upon termination of Executive's employment with the Employer, for whatever reason said termination occurs. The obligations of Executive under this Section 6 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 7. Non-competition and Non-solicitation. 7.1 Non-competition. During the term of this Agreement and during the period for which Executive is entitled to receive compensation after the termination of this Agreement pursuant to subparagraphs 4.3.8 or 4.4.2, regardless of whether such compensation is paid in a lump sum rather than monthly payments, Employee shall not engage, anywhere within New York State, whether directly or indirectly, as principal, owner, officer, director, agent, employee, consultant or partner, in the management of a bank holding company, commercial bank, savings bank, credit union or any other financial services provider that competes with FII, its subsidiaries or its products or programs ("Restricted Activities"), provided that the foregoing shall not restrict Executive from engaging in any Restricted Activities which Employer directs Executive to undertake or which Employer otherwise expressly authorizes. The foregoing shall not restrict Executive from owning less than 5% of the outstanding capital stock of any company which engages in Restricted Activities, provided that Executive is not otherwise involved with such company as an officer, director, agent, employee or consultant 7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing compliance with the provisions of Section 7.1, Executive may be a principal, owner, officer, director, agent, consultant or partner, of any corporation, partnership or other entity. The foregoing provisions of Section 7.1 shall not be held invalid because of the scope of the territory covered, the actions restricted thereby, or the period of time such covenant is operative. In the event of a breach or threatened breach by the Executive of 8 Section 7.1, Employer shall be entitled to a temporary restraining order and an injunction restraining Executive from the commission of such breach. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of money damages. 7.3 Non-solicitation. During the term of this Agreement and for a two (2) year period following the Termination Date, Executive shall not, directly or indirectly, without the written consent of Employer: (i) recruit or solicit for employment any employee of Employer or FII or encourage any such employee to leave their employment with Employer or FII, or (ii) solicit, induce or influence any customer, supplier, lessor or any other person or entity which has a business relationship with Employer or FII to discontinue or reduce the extent of such relationship with Employer or FII. 7.4 In the event that the Executive breaches any of the provisions of paragraphs 7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2 shall cease immediately. Executive shall have no further entitlement to receive cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have no further liability for such payments after the date of Executive's breach. 7.5 The Executive and the Employer believe that the restrictions and covenants in this section are reasonable and enforceable under the circumstances. However, if any one or more of the provisions in this section shall, for any, reason be held to be excessively broad as to time, duration, geographic scope, activity, or subject, it shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with law and with the Executive's and the Employer's intentions as stated herein. 7.6 Survival of Obligations. The obligations of Executive and Employer under this Section 7 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 8. Miscellaneous. 8.1 Remedies. Each of the parties hereto shall have all rights and remedies set forth in this Agreement. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law or any other agreement or contract to which such person is a party. Each party shall be entitled to enforce such rights specifically (without the requirement of posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Without limiting the generality of the foregoing, Executive specifically agrees that any breach or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to Employer, that money damages would not provide an adequate remedy to Employer, and that Employer shall accordingly have the right and remedy (i) to obtain an injunction prohibiting Executive from violating or threatening to violate such provisions, (ii) to have such provisions specifically enforced by any court of competent jurisdiction, and (iii) to require Executive to account for and pay over to Employer all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any transactions constituting a breach of such provisions. 9 8.2 Entire Agreement; Amendments and Waivers. This Agreement (including the schedule hereto) represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and can be amended, supplemented or changed, and any provision hereof can be waived, only by a written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 8.3 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without reference to its principles of conflicts of law. 8.4 Notices. All notices, demands, solicitations of consent or approval, and other communications hereunder shall be in writing and shall be delivered personally, mailed, sent by telefax or sent by recognized commercial courier (e.g., Federal Express). If delivered personally, such notice shall be deemed to be given when delivered to the intended recipient. If delivered by mail, such notice shall be deemed to be given five (5) days after having been deposited in the United States mail so addressed, with postage thereon prepaid. If delivered by telefax, such notice shall be deemed given when transmission of the notice is complete to the telefax number of the other party. If delivered by recognized commercial carrier, such notice shall be deemed given one (1) day after having been delivered to a recognized commercial carrier for overnight delivery. All such notices shall be addressed to the address set forth in the preamble to this Agreement or to such other address which such party shall have given to the other party for such purpose by notice hereunder. 8.5 Captions. The headings used in this Agreement are intended for reference purposes only and shall not control or affect in any manner the meaning or interpretation of any of the provisions of is Agreement. 8.6 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions of this Agreement, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. All provisions of this Agreement shall be enforced to the full extent permitted by law. 8.7 Interpretation. The parties acknowledge and agree that: (i) each party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all parties hereto, regardless of which party was generally responsible for the preparation of this Agreement. 8.8 Counterparts. This Agreement may be executed in any number of copies, each of which shall be deemed an original, and all of which together will be deemed one and the same instrument. 8.9 Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind, and inure to the benefit of the respective successors and permitted assigns of the parties hereto whether so expressed or not. Neither party shall transfer or assign this Agreement or any of their rights or obligations hereunder, whether by operation of law or otherwise, without the prior written consent of the other party hereto. Any attempted transfer or assignment of this Agreement or any rights or obligations hereunder in violation of this provision shall be void ab initio. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. FINANCIAL INSTITUTIONS, INC. FIRST TIER BANK & TRUST By: /s/Peter G. Humphrey By: /s/Randolph C. Brown --------------------------- ----------------------------- Peter G. Humphrey Randolph C. Brown President & CEO President & CEO EX-10 10 burkeempl.txt EXHIBIT 10.9 EMPLOYMENT AGREEMENT/BURKE EX-10.9 (Exhibit 10.9) Employment Agreement-Patrick C. Burke EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of the 22nd day of October, 2001, between FINANCIAL INSTITUTIONS, INC. ("Employer" or "FII"), a financial holding company formed under the laws of New York having its principal office at 220 Liberty Street, Warsaw, New York 14679 and PATRICK C. BURKE ("Executive"), an individual residing at 1432 Clover Street, Brighton, New York 14610. WHEREAS, Employer wishes to employ Executive in an executive capacity, as President of the Burke Group, Inc. ("Burke Group") and as Senior Vice President of Finanical Institutions, Inc, and Executive wishes to accept such employment on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants herein contained, Employer and Executive hereby agree as follows: 1. Effective Date; Term. 1.1 Effective Date. This Agreement shall be effective commencing on the date hereof (the "Effective Date"). 1.2 Initial Term. Employer employs Executive, and Executive accepts such employment, commencing on the Effective Date (the "Initial Term") through January 1, 2005. 1.3 Renewal Term. This Agreement will automatically renew for successive three year terms (each a "Renewal Term") upon the expiration of the Initial Term or a subsequent Renewal Term unless either party provides written notice to the other at least ninety (90) days before the end of the Initial Term or Renewal Term that such party does intend to renew this Agreement upon the expiration thereof. 1.4 Termination. This Agreement may be terminated prior to the expiration of the Initial Term or any Renewal Term as provided in Sections 4.1 and 4.4 of this Agreement (see Early Retired Employee). 2. Scope of Employment. 2.1 Position and Duties. During the term of this Agreement, Employer shall employ Executive to serve as the President of Burke Group and Senior Vice President of Financial Institutions, Inc.. In such capacity, Executive shall perform such executive, administrative and operational duties as may be assigned to Executive from time to time by the Board of Directors of Employer. 2.2 Exclusive Efforts. Executive agrees to serve Employer and Burke Group faithfully and to the best of Executive's ability and to devote Executive's entire business time, attention and efforts to the interests and business of Employer and Burke Group. 2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to and perform all his duties in accordance with applicable laws, rules and regulations and the written policies and procedures of Employer in effect from time to time. 1 3. Compensation, Benefits and Expenses. 3.1 Base Salary. Except as otherwise provided in this Agreement, during the period from the Effective Date through December 31, 2001 (the "First Year") Employer shall pay to Executive a base salary at a rate of One Hundred and Fifty Thousand Dollars ($150,000) per year (the "Base Salary"). The Base Salary may be increased, in the sole discretion of Employer, in a manner comparable to other senior executives, during the remainder of the terms of this Agreement but may not be decreased. Employer shall pay the Base Salary to Executive in equal installments pursuant to Employer's standard payroll policies and Executive's salary shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may receive bonuses as follows: 3.2.1 If the Burke Group meets or exceeds target performance factors determined pursuant by the FII board, the Executive shall be paid a bonus which shall be determined by the Compensation Committee of the Board of Directors of Employer. 3.2.2 The bonus earned by Executive each year during the term of this Agreement, if any, shall be paid to Executive in a lump sum promptly after the Employer's audited annual financial results are publicly disclosed. 3.2.3 Payment of any bonus shall be subject to such withholding or deductions as may be mutually agreed between Employer and Executive or required by law. 3.3 Incentive Stock Plan Benefits. During the period of his employment, Executive shall be entitled to receive grants of options under any incentive stock plan operated by Financial Institutions, Inc. ("FII") for its employees and those of its subsidiaries, in such amounts as may be determined by the FII Board of Directors or the FII Compensation Committee in a manner comparable to other senior executives of FII. 3.4 Fringe Benefits. During the period of his employment, Executive shall be entitled to participate in FII's plans for the welfare and benefit of its employees to the extent Executive satisfies the requirements provided in such health plans, including health standards, and other qualifications for participation. In the event Executive becomes a "Retired Early Employee" as defined in subparagraph 4.4.1, or is terminated for reasons other than those set forth in subparagraphs 4.1.3, 4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as if Executive continued to remain an employee for the remainder of the Initial Term or Renewal Term then in effect, or until Executive obtains a position offering comparable benefits, whichever occurs first. 3.5 Vacation and Holidays. During the term of this Agreement, Executive shall accrue paid vacation in accordance with Employer's policies of four (4) weeks per calendar year starting in 2002, and two (2) weeks during the remainder of 2001. Executive shall be entitled to take accrued vacation days and paid holidays in accordance with Employer's policies applicable to its employees generally. Executive may not carry forward vacation days from year to year. 3.6 Expenses. During the term of this Agreement, Employer authorizes Executive to incur reasonable and necessary out-of-pocket business expenses in the course of performing his duties and rendering services hereunder in accordance with Employer's policies with respect thereto, and Burke Group shall reimburse Executive for all such expenses, provided (i) such expenses and the purpose for which they were incurred, are in accordance with Burke Group and Employer's policies, and (ii) Executive timely submits to Employer expense reports and substantiation of the expenses in accordance with Employer's policies. 2 3.7 Country Club Dues and Automobile Expenses. During the term of this Agreement, Burke Group shall reimburse Executive for monthly membership dues at the Country Club of Rochester, and shall provide Executive with use of a suitable automobile through a monthly lease payment not to exceed $500 per month. 4. Termination of Employment. 4.1 Events of Termination. Executive's Employment by Employer shall terminate at the expiration of the Initial Term or any Renewal Term provided timely notice is given as provided in Section 1.3 and shall terminate prior to the expiration of the then current term, if any of the following occur: 4.1.1 the death of Executive; 4.1.4 the date on which Executive is (i) determined to be "permanently disabled" as defined under the disability insurance policy covering Executive, or (ii) if Executive is not covered by any such disability policy, Executive is determined to be "totally disabled" by the Board of Directors of Employer based upon the advice of a board certified physician reasonably acceptable to Employer and Executive or his legal representative, which may include a determination that Executive is or may be unable, because of physical or mental illness or incapacity or otherwise, to fulfill his duties under this Agreement for six consecutive months 4.1.5 the commission by Executive of, or the determination by the Board of Directors based on reasonable evidence as presented by a law enforcement agency or as a result of an internal or external audit or investigation that the Executive has committed (i) a criminal offense involving the violation of state or federal law, (ii) a breach of fiduciary duty, (iii) an act of dishonesty, fraud or misrepresentation, or (iv) any act of moral turpitude all of which the Board of Directors determines (x) has or may be reasonably expected to have a material detrimental impact on Employer's business or operations, or (y) which may prevent, because of its demonstrated or demonstrable effect on employees, regulatory agencies or customers, Executive from effectively performing his executive and other duties under this Agreement; 4.1.4 Executive fails to satisfactorily perform the duties which Executive is required to perform under this Agreement or performs such duties other than in good faith, as determined by the Board of Directors. The Board of FII will provide a written notice to the Executive, specifying the unsatisfactory performance and suggest what must be done to improve and maintain such performance. The written notice will also specify the time period (considered probationary period) given the Executive to correct such unsatisfactory performance. 4.1.5 the termination of Executive's employment by Employer during the term of this Agreement for any reason without cause other than pursuant to Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4; 4.1.6 Executive's resignation or retirement; or 4.1.7 the mutual consent to such termination in writing by Executive and Employer. 3 4.2 Time of Termination. Executive's employment with Employer shall terminate immediately upon Executive's death, upon written notice of termination from Employer or Executive upon the occurrence of an event specified in Sections 4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified in Section 4.1.4, on the date specified in the agreement terminating Executive's employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or a Renewal Term if timely notice is given pursuant to Section 1.3 (as applicable, the "Termination Date"). Employer's and Employee's obligations under this Agreement shall terminate upon such termination of employment without any further action by the parties except to the extent specifically provided herein. 4.3 Effect of Termination of Employment. Following the Termination Date: 4.3.1 Executive shall return all property of Employer as provided in Section 6 of this Agreement; 4.3.2 Executive's base salary shall cease to accrue; 4.3.3 Subject to Section 4.4, the Board of Directors of FII shall pay an appropriate bonus to Executive as his bonus or other incentive compensation for the period through the Termination Date computed consistently with the manner in which Executive's bonus or incentive compensation would have been determined for such period, as defined in Section 3.2, if Executive's employment had not terminated; 4.3.4 Executive's participation in FII's benefit plans shall cease except as required by law, the terms of the plan(s) or as provided in subparagraph 3.4 of this Agreement; 4.3.5 Executive shall cease to accrue vacation days and shall be paid for unused vacation time accrued in accordance with Employer's policies applicable to employees generally; and 4.3.6 Executive shall submit any claims for reimbursement of business expenses incurred in accordance with Section 3.5 within the time period required under Employer's policies generally or Employer will not be obligated to reimburse such expenses. 4.3.7 In the case of an early termination as a Retired Early Employee, the Employer shall have no further liability to Executive hereunder, except as explicitly stated in this Agreement, other than for earned but unpaid compensation and those benefits (accrued but unpaid) to which Executive is entitled under this Agreement through the Termination Date, including termination in the cases listed in Section 3.4, continued fringe benefits as provided in such Section 3.4. Upon Termination of Employment, for any reason, all split dollar insurance policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.3.8 If, during the term of this Agreement, the Executive is terminated for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2, 4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the one year period after the Termination Date, make equal monthly payments, or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Termination Date, equals the sum of (a) the Base Salary Amount paid to Executive, and (b) the annual incentive compensation pursuant to Section 3.2 and 3.4 of this Agreement, earned by Executive for the most recent tax year ending before Termination Date OCCURRED. It shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. 4.4. Change of Control and Change of Authority 4 4.4.1 Retired Early Employee. If a Change of Control and Change of Authority, as such terms are defined in subparagraph 4.4.7 below, occurs during the term of the Executive's employment under this Employment Agreement, either the Executive, on the one hand, or Employer, on the other, may elect by written notice, given to the other party or parties, at any time within twelve (12) months after such Change of Control and Change of Authority, to terminate the employment of the Executive by Employer, whereupon the Executive will become a "Retired Early Employee," and will be entitled to receive such payments as are provided hereafter in this Section 4.4. Such election and the termination of the Executive's employment shall become effective on the first day of the second calendar month commencing after delivery of the notice or on such earlier date as the Executive in his sole discretion may specify (the "Effective Date"). 4.4.2 Cash Payments. If the Executive should become a Retired Early Employee hereunder, Employer shall, during the period commencing on the Effective Date and ending two years thereafter (the "Pay-Out Period"), make equal monthly payments, or a single lump sum payment to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Effective Date, equals the sum of two times the Base Salary Amount paid to Executive, as such term is defined in subparagraph 4.4.7 below, plus the sum of the annual bonus earned by Executive, for the most recent two (2) tax years ending before the date on which the Change of Control and Change of Authority occurred. The Executive shall request the method of payment, however, it shall be at the discretion of the Compensation Committee, as to whether the payment is made as a single lump sum payment or equal monthly payments. The payment(s) provided for in subparagraph 4.3.8 do not apply to Retired Early Employees who receive cash payment(s) pursuant to this subparagraph. If at any time during the Pay-Out Period the Compensation Committee of the Board in its sole discretion shall determine, upon application of the Retired Early Employee supported by substantial evidence, that the Retired Early Employee is then under a severe financial hardship resulting from (i) a sudden and unexpected illness or accident of the Retired Early Employee or any of his dependents (as defined in section 152(a) of the Internal Revenue Code), (ii) loss of the Retired Early Employee's property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Retired Early Employee, Employer shall make available to the Retired Early Employee, in one (1) lump sum, an amount up to but not greater than the present value of all monthly payments remaining to be paid to him in the Pay-Out Period, calculated as of the date of such determination by the Compensation Committee of the Board, for the purpose of relieving such severe financial hardship to the extent the same has not been or may not be relieved by (xi) reimbursement or compensation by insurance or otherwise, (xii) liquidation of the Retired Early Employee's assets (to the extent such liquidation would not itself cause severe financial hardship), or (xiii) distributions from other benefit plans. If (a) the lump sum amount thus made available is less than (b) the present value of all such remaining monthly payments, Employer shall continue to pay to the Retired Early Employee monthly payments for the duration of the Pay-Out Period, but from such date forward such monthly payments will be in a reduced amount such that the present value of all such reduced payments will equal the difference between (b) and (a), above. The Retired Early Employee may elect to waive any or all payments due him under this subparagraph. 4.4.3 Acceleration of Stock Options. All options and other rights that Executive may hold to purchase or otherwise acquire Common Stock of FII shall immediately become vested and exercisable in full for the total number of shares that are or might become purchasable thereunder, in each case without further condition or limitation except the giving of notice of exercise and the payment of the purchase price thereunder (but without amendment of the plan under which they were issued). At his discretion, Executive may elect to surrender to Employer his rights in any such options and rights held by him and, upon that surrender, Employer shall pay him an amount in cash equal to the aggregate spread between the exercise prices of all those options and rights and the value of the Common Stock purchasable thereunder (or of any other 5 security into which the Common Stock has been exchanged or converted) as of the date of the termination of employment, the value to be determined by the reported last sale price of the Common Stock or that other security (or the mean between the reported last bid and asked prices) on that date on NASDAQ (or, if it is not NASDAQ, on whatever may then be the principal exchange or quotation system on which the Employer's Common Stock or that other security is traded at that time). 4.4.4 Life Insurance Policies. Employer shall repay any policy loans previously taken on the Employer's insurance policies on Executive's life (provided that the directors of Employer were given written notice promptly after the making of any such loans which were made while Executive was the president and chief executive officer of Employer), and then shall transfer to Executive any and all of its right, title, and interest in and to all Employer life insurance policies on Executive's life (and upon that transfer, Executive shall be deemed to have released Employer from any and all obligations it then owes to him to maintain and pay premiums on those policies, all other provisions of any agreements under which those policies were agreed to be maintained, however, to remain in effect). Upon termination of employment, all split dollar policies in effect on the Executive's life will terminate. The Executive shall have the right, under the terms of the split dollar agreement, to purchase the policies by paying to the Corporation an amount as defined in Article 7.1 of the Split Dollar Agreement. 4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies before receiving all monthly payments payable to him under subparagraph 4.4(b), above, Employer shall pay to the Retired Early Employee's estate one (1) lump sum payment in an amount equal to the present value of all such remaining unpaid monthly payments, determined as of the date of death of the Retired Early Employee. If the Retired Early Employee was receiving health insurance and dental benefits pursuant to paragraph 3.4 hereof at the time of death, employer shall continue to provide such health insurance and dental benefits to the dependents of the deceased Retired Early Employee for the duration specified in paragraph 3.4, if the Retired Early Employee had not died. 4.4.6 Indemnification of Executive. In the event a Change of Control and Change of Authority occurs, Employer shall indemnify Executive for all reasonable legal fees and expenses subsequently incurred by Executive through legal counsel approved in advance by Employer [(which approval shall not be unreasonably withheld)] in seeking to obtain or enforce any right or benefit provided under this Employment Agreement, including but not limited to the rights and benefits provided under this Section 4.4 and whether or not Executive has become a Retired Early Employee hereunder, provided, however, that such right to indemnification will not apply if and to the extent that a court of competent jurisdiction shall determine that any such fees and expenses have been incurred as a result of Executive's bad faith or willful misconduct [or if such a court dismisses the action seeking to enforce the right or benefit for failure to state a claim]. Indemnification payments payable hereunder by Employer shall be made not later than thirty (30) days after a request for payment has been received from Executive with such evidence of indemnifiable fees and expenses as Employer may reasonably request. 4.4.7 Definitions. (i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall equal the annual compensation payable by Employer to Executive and includable by Executive in gross income for the most recent year ending before the date on which the Change of Control and Change of Authority occurred. (ii) A "Change of Control" shall be deemed to have occurred if 6 (A) any individual corporation (other than FII), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more securities transactions (including gifts and stock repurchases but excluding transactions described in subdivision (B), following), of securities of FII possessing twenty percent (20%) or more of the voting power for the election of directors of such entity, (B) there shall be consummated any consolidation, merger or stock-for-stock exchange involving FII or the securities of FII in which the holders of voting securities of FII immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of FII (or, if FII does not survive such transaction voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the total voting power in an election of directors of FII (or such other surviving corporation), excluding securities received by any members of such group which represent disproportionate percentage increases in their shareholdings vis-a-vis the other members of such group, (C) "approved directors" shall constitute less than a majority of the entire Board of Directors of FII, with "approved directors" defined to mean the members of the Board of Directors of FII as of the date of this Agreement and any subsequently elected members who shall be nominated or approved by a majority of the approved directors on the Board of FII prior to such election, or (D) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions, excluding any transaction described in subdivision (B), above), of all, or substantially all, of the assets of FII to a party which is not controlled by or under common control with FII. (iii) A "Change of Authority" shall be deemed to have occurred if upon the occurrence of a Change in Control, Executive, without his/her written consent, is required by Employer to accept any demotion, loss of title, or office, reduction in his annual compensation or benefits, or relocation of his principal place of employment by more than 25 miles from its location immediately prior to the Change in Control; provided, however, that Executive may consent in writing to any such demotion, loss, reduction or relocation. 5. Confidentiality; Inventions. 5.1 Confidential Information. Executive has and will have access to and participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of Burke Group and Employer, its subsidiaries and any affiliates (collectively, the "Companies"), including but not limited to (i) business plans, software programs, operating plans, marketing plans, financial reports, operating data, budgets, wage and salary rates, pricing strategies and information, terms of agreements with suppliers or customers and others, customer lists, reports, correspondence, tapes, disks, tangible property and specifications owned by or used in the Burke Group's or Companies' businesses; (ii) operating strengths and weaknesses of the Burke Group or Companies' officers, directors, employees, agents, suppliers and customers, and/or (iii) information pertaining to future developments such as, but not limited to, research and development, software development or enhancement, future marketing plans or ideas, and plans or ideas for new services or products, (iv) all information which is learned or developed by Executive in the course and performance of his duties under this Employment Agreement, including without limitation, reports, information and data relating to the Burke Group's or Employer's acquisition strategies, and (v) other tangible and intangible 7 property which is used in the business and operations of the Companies but not made publicly available (i) through (v) are, collectively, (the "Confidential Information"). 5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive shall not, directly or indirectly, disclose, use or make known for his or another's benefit any Confidential Information of the Burke Group or Companies or use such Confidential Information in any way except in the best interests of the Burke Group or Companies in the performance of Executive's duties under this Agreement. In addition, to the extent that Employer has entered into a confidentiality agreement with any other person or entity Executive agrees to comply with the terms of such confidentiality agreement and to be subject to the restrictions and limitations imposed by such confidentiality agreements as if he was a party thereto. 5.3 Inventions. Executive shall promptly disclose both orally and in writing to Employer all discoveries, ideas, software, developments, discoveries, designs, improvements, innovations and inventions (collectively referred to herein as "Inventions"), whether patentable or not, either relating to the existing or contemplated business, products, services, plans, processes, or procedures of Employer, or suggested by or resulting from Executive's work at Employer, or resulting wholly or in part from the use of Employer's time, material, facilities or ideas, which Executive made or conceived or may make or conceive, whether or not during working hours, alone or with others, at any time during the term of this Agreement or within one year thereafter, and Executive agrees that all such inventions shall be the exclusive property of the Employer. 5.4 Assignment of Inventions. Executive hereby assigns to Employer all his rights and interests in and to all such inventions and all patents, copyrights, trademarks or other types of intellectual property protection which may be obtained on them, in this and all foreign countries. At Employer's expense, but without charge to it, Executive agrees to execute, acknowledge and deliver to Employer any specific assignments to any such inventions or other relevant documents and to take any such further action as may be considered necessary by Employer at any time to obtain or defend letters patent in any and all countries, to obtain documents relating to registration, ownership or transfer of copyrights, to vest title in such inventions in Employer or its assigns, or to obtain for Employer any other legal protection for such inventions. 5.5 Survival of Obligations. The obligations of Executive under this Section 5 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 6. Return of Employer's Property. Immediately upon the Termination Date, Executive shall deliver to Employer all copies of data, information and knowledge, including, without limitation, all notes, reference materials, sketches, diagrams, reproductions, memoranda, documentation and records incorporating or reflecting any Confidential Information, documents, correspondence, notebooks, reports, computer programs, names of full-time and part-time employees and consultants, and all other materials and copies thereof (including computer disks and other electronic media) relating in any way to the business of Employer in any way obtained by Executive during the period of his employment with Employer, along with any automobile provided by Employer for Executive's use (the "Employer's Property"). The Employer's Property shall belong exclusively to the Employer and shall be delivered to the Employer immediately upon termination of Executive's employment with the Employer, for whatever reason said termination occurs. The obligations of Executive under this Section 6 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 7. Non-competition and Non-solicitation. 7.1 Non-competition. During the term of this Agreement and for a period of three (3) years thereafter, Employee shall not engage, anywhere within New York State, whether directly or indirectly, as principal, owner, officer, director, agent, employee, consultant or partner, in the management of a bank holding company, commercial bank, savings bank, credit union, an employee benefits consulting firm, an entity that provides services in any way similar to the Burke Group or any other financial services provider that competes with FII, its subsidiaries or its products or programs ("Restricted Activities"), provided that the foregoing shall not restrict Executive from engaging in any Restricted Activities which Employer directs 8 Executive to undertake or which Employer otherwise expressly authorizes. The foregoing shall not restrict Executive from owning less than 5% of the outstanding capital stock of any company which engages in Restricted Activities, provided that Executive is not otherwise involved with such company as an officer, director, agent, employee or consultant 7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing compliance with the provisions of Section 7.1, Executive may be a principal, owner, officer, director, agent, consultant or partner, of any corporation, partnership or other entity. The foregoing provisions of Section 7.1 shall not be held invalid because of the scope of the territory covered, the actions restricted thereby, or the period of time such covenant is operative. In the event of a breach or threatened breach by the Executive of Section 7.1, Employer shall be entitled to a temporary restraining order and an injunction restraining Executive from the commission of such breach. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of money damages. 7.3 Non-solicitation. During the term of this Agreement and for a three (3) year period therafter, Executive shall not, directly or indirectly, without the written consent of Employer: (i) recruit or solicit for employment any employee of Burke Group, FII or any FII subsidiaries or encourage any such employee to leave their employment with Burke Group, FII or any FII subsidiaries, or (ii) solicit, induce or influence any customer, supplier, lessor or any other person or entity which has a business relationship with Burke Group, FII or any FII subsidiaries to discontinue or reduce the extent of such relationship with Burke Group, FII or any FII subsidiaries. 7.4 In the event that the Executive breaches any of the provisions of paragraphs 7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2 shall cease immediately. Executive shall have no further entitlement to receive cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have no further liability for such payments after the date of Executive's breach. 7.5 The Executive and the Employer believe that the restrictions and covenants in this section are reasonable and enforceable under the circumstances. However, if any one or more of the provisions in this section shall, for any, reason be held to be excessively broad as to time, duration, geographic scope, activity, or subject, it shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with law and with the Executive's and the Employer's intentions as stated herein. 7.6 Survival of Obligations. The obligations of Executive and Employer under this Section 7 shall survive the termination of Executive's employment and the expiration or termination of this Agreement. 8. Miscellaneous. 8.1 Remedies. Each of the parties hereto shall have all rights and remedies set forth in this Agreement. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law or any other agreement or contract to which such person is a party. Each party shall be entitled to enforce such rights specifically (without the requirement of posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Without limiting the generality of the foregoing, Executive specifically agrees that any breach or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to Employer, that money damages would not provide an adequate remedy to Employer, and that Employer shall accordingly have the right and remedy (i) to obtain an injunction prohibiting Executive from violating or threatening to violate such provisions, (ii) to have such provisions specifically enforced by any court of competent jurisdiction, and (iii) to require Executive to account for and pay over to Employer all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any transactions constituting a breach of such provisions. 8.2 Entire Agreement; Amendments and Waivers. This Agreement (including the schedule hereto) represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and can be amended, supplemented or changed, and any provision hereof can be waived, 9 only by a written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 8.3 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without reference to its principles of conflicts of law. 8.4 Notices. All notices, demands, solicitations of consent or approval, and other communications hereunder shall be in writing and shall be delivered personally, mailed, sent by telefax or sent by recognized commercial courier (e.g., Federal Express). If delivered personally, such notice shall be deemed to be given when delivered to the intended recipient. If delivered by mail, such notice shall be deemed to be given five (5) days after having been deposited in the United States mail so addressed, with postage thereon prepaid. If delivered by telefax, such notice shall be deemed given when transmission of the notice is complete to the telefax number of the other party. If delivered by recognized commercial carrier, such notice shall be deemed given one (1) day after having been delivered to a recognized commercial carrier for overnight delivery. All such notices shall be addressed to the address set forth in the preamble to this Agreement or to such other address which such party shall have given to the other party for such purpose by notice hereunder. 8.5 Captions. The headings used in this Agreement are intended for reference purposes only and shall not control or affect in any manner the meaning or interpretation of any of the provisions of is Agreement. 8.6 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions of this Agreement, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. All provisions of this Agreement shall be enforced to the full extent permitted by law. 8.7 Interpretation. The parties acknowledge and agree that: (i) each party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all parties hereto, regardless of which party was generally responsible for the preparation of this Agreement. 8.8 Counterparts. This Agreement may be executed in any number of copies, each of which shall be deemed an original, and all of which together will be deemed one and the same instrument. 8.9 Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind, and inure to the benefit of the respective successors and permitted assigns of the parties hereto whether so expressed or not. Neither party shall transfer or assign this Agreement or any of their rights or obligations hereunder, whether by operation of law or otherwise, without the prior written consent of the other party hereto. Any attempted transfer or assignment of this Agreement or any rights or obligations hereunder in violation of this provision shall be void ab initio. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. FINANCIAL INSTITUTIONS, INC. EXECUTIVE By: /s/Peter G. Humphrey By: /s/Patrick Burke --------------------------- --------------------------- Peter G. Humphrey Patrick Burke President & CEO 11 EX-21 11 subs.txt EXHIBIT 21.1 SUBSIDIARIES EX-21 (Exhibit 21) Subsidiaries of Financial Institutions, Inc. Wyoming County Bank (99.65% owned) The National Bank of Geneva (99.10% owned) The Pavilion State Bank (100% owned) First Tier Bank & Trust (100% owned) Bath National Bank (100% owned) Burke Group, Inc. (100% owned) The FI Group, Inc. (100% owned) EX-23 12 accountantconsent.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANT EX-23 (Exhibit 23) Independent Accountants' Consent INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors Financial Institutions, Inc.: We consent to incorporation by reference in the Registration Statements on Form S-8 (No. 333-82202), (No. 333-40544) of Financial Institutions, Inc. of our report dated January 22, 2002, relating to the consolidated statements of financial condition of Financial Institutions, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2001, which report has been included in the December 31, 2001 Annual Report on Form 10-K of Financial Institutions, Inc. /s/ KPMG LLP Buffalo, New York March 11, 2002 -----END PRIVACY-ENHANCED MESSAGE-----