-----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, HEC5A84AodGB/8zVUdud2X5JJPbtPtXZCDFydzlYjMWtcqo/Zvl2gzk+ox98E4FI HLmvVuE/kG6JiNuD2EiYwg== 0001005477-01-002300.txt : 20010330 0001005477-01-002300.hdr.sgml : 20010330 ACCESSION NUMBER: 0001005477-01-002300 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 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-K405 SEC ACT: SEC FILE NUMBER: 000-26481 FILM NUMBER: 1584614 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-K405 1 0001.txt ANNUAL REPORT Table of Contents - -------------------------------------------------------------------------------- To jump to a section, double-click on the section name. 10-K PART I.........................................................................3 ITEM 1.........................................................................3 Table1.........................................................................3 Table2.........................................................................6 Table3.........................................................................7 Table4.........................................................................7 ITEM 2........................................................................16 Table5........................................................................16 ITEM 3........................................................................16 ITEM 4........................................................................17 PART II.......................................................................17 ITEM 5........................................................................17 Table6........................................................................17 ITEM 6........................................................................17 Table7........................................................................17 ITEM 7........................................................................19 ITEM 8........................................................................19 ITEM 9........................................................................19 PART III......................................................................19 ITEM 10.......................................................................19 ITEM 11.......................................................................19 ITEM 12.......................................................................19 ITEM 13.......................................................................19 PART IV.......................................................................19 ITEM 14.......................................................................19 EX-13 Annual Report to Shareholders.................................................24 Table8........................................................................25 Table9........................................................................36 Table10.......................................................................37 Table11.......................................................................38 Table12.......................................................................39 Table13.......................................................................40 Table14.......................................................................41 Table15.......................................................................42 Table16.......................................................................42 Table17.......................................................................42 Table18.......................................................................43 Table19.......................................................................44 Table20.......................................................................45 Table21.......................................................................46 Table22.......................................................................46 Table23.......................................................................49 Table24.......................................................................50 Consolidated Statements of Financial Condition................................52 Consolidated Statements of Income.............................................53 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income....................................................54 Consolidated Statements of Cash Flows.........................................55 Table25.......................................................................58 Table26.......................................................................59 Table27.......................................................................60 Table28.......................................................................60 Table29.......................................................................61 Table30.......................................................................61 Table31.......................................................................62 Table32.......................................................................62 Table33.......................................................................63 Table34.......................................................................63 Table35.......................................................................63 Table36.......................................................................64 Table37.......................................................................64 Table38.......................................................................64 Table39.......................................................................65 Table40.......................................................................65 Table41.......................................................................66 Table42.......................................................................67 Table43.......................................................................67 Table44.......................................................................67 Table45.......................................................................68 Table46.......................................................................69 Table47.......................................................................69 Condensed Statements of Condition (Parent Only)...............................70 Condensed Statements of Income (Parent Only)..................................70 Condensed Statements of Cash Flows (Parent Only)..............................71 Table48.......................................................................72 Table49.......................................................................72 EX-21 Subsidiaries of Financial Institutions, Inc...................................77 EX-23 Independent Accountants' Consent..............................................77 EX-27.1 Exhibit 27 Table..............................................................77 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transaction period from __________________ to ____________________ 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) (716)786-1100 -------------------------------------------------------------- (Registrant's Telephone Number Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: NONE --------------------------- Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE -------------------------------------------------------------- (Title of Class) 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. |X| As of March 2, 2001 there were issued and outstanding, exclusive of treasury shares, 10,986,721 shares of the Registrant's Common Stock. The aggregate market value of the 8,277,493 shares of voting stock held by non-affiliates of the Registrant was $125,197,000, as computed by reference to the last sales price on March 2, 2001, 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. - -------------------------------------------------------------------------------- Page 1 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement for its 2001 Annual Meeting of Shareholders and portions of its 2000 Annual Report to Shareholders are incorporated by reference in Parts II and III of this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- Page 2 PART I ITEM 1. BUSINESS GENERAL Financial Institutions, Inc. (the "Company") is a bank 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 four commercial banks that provide consumer, commercial and agricultural banking services in Western and Central New York State: Wyoming County Bank, The National Bank of Geneva, The Pavilion State Bank and First Tier Bank & Trust (collectively, the "Banks"). The 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 the acquisition of branches of other banks. The Company is also the parent company of The FI Group, Inc. ("FIGI"), a brokerage subsidiary that commenced operations in March 2000. The Company became qualified on May 12, 2000 as a financial holding company (see Gramm-Leach-Bliley Act discussion on page 15.) On November 2, 2000, FII reached a definitive agreement to acquire all of the outstanding stock of Bath National Corporation (BNC) and its wholly-owned subsidiary bank, Bath National Bank (BNB). BNB is a full-service community bank headquartered in Bath, New York, which has 11 branch locations in Steuben, Yates, Ontario and Schuyler Counties. Consolidated assets of BNC were $287.9 million as of December 31, 2000. FII has agreed to pay $48.00 per share in cash for each of the outstanding shares of BNC common stock, for an aggregate purchase price of approximately $62.6 million. The acquisition, which has been approved by the BNC shareholders, but is subject to approval 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 2001. 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 its 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, 2000, are depicted in the following table: (Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------- Percent of Percent of Subsidiary Assets Total Net Income Total - ---------------------------------------------------------------------------------------------------------- Wyoming County Bank $ 494,589 39% $ 7,549 42% The National Bank of Geneva 488,181 38 7,154 40 The Pavilion State Bank 171,186 13 2,005 11 First Tier Bank & Trust 131,638 10 1,523 8 Parent, The FI Group, Inc. and eliminations, net 3,733 -- (131) (1) - ---------------------------------------------------------------------------------------------------------- Total $1,289,327 100% $18,100 100% - ----------------------------------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS This Report contains certain forward-looking statements within the meaning of - -------------------------------------------------------------------------------- Page 3 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 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 32 branches and has 41 ATMs in ten contiguous counties of Western and Central New York State: Allegany, Cattaraugus, Erie, Genesee, Livingston, Monroe, Ontario, Seneca, 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. Western and Central New York have a high density of financial institutions, most of which are branches of significantly larger 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 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 some of its 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 portfolio. The Company retains the servicing rights on all 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. Revisions to these bank subsidiary policies are reviewed before they are presented to the banks' Boards of Directors for approval. These policies establish the lending authority of individual loan officers as well as the loan authority of the banks' loan committees. Typical loan authority for any individual is less than $100,000 and less than $300,000 for the officer's loan committee at each bank subsidiary. Each bank subsidiary has an outside loan committee, which includes members of the subsidiary bank's Board of Directors, that acts on loans over - -------------------------------------------------------------------------------- Page 4 $300,000. In addition, any loans over $3.0 million must be approved by the Company's Loan Approval Committee. 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 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 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, equipment or other assets owned by the borrower and a personal guarantee of the borrower is obtained. At December 31, 2000, $32.1 million, or 18.9%, of the aggregate commercial loan portfolio was at fixed rates while $137.7 million, or 81.1%, 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 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, 2000, $35.4 million, or 21.3%, of the aggregate commercial real estate loan portfolio was at fixed rates while $130.7 million, or 78.7%, 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, 2000, $12.7 million, or 7.7%, of the agricultural loan portfolio was at fixed rates while $152.6 million, or 92.3%, 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 Company originates 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, 2000, the servicing portfolio totaled $184.7 million in residential mortgages, all of which have been sold to Freddie Mac. At December 31, 2000, $117.4 million, or 58.3%, of residential real estate loans retained in portfolio was at fixed rates while $84.1 million, or 41.7%, was at variable rates. Consumer and Home Equity Loans. The Company originates 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 - -------------------------------------------------------------------------------- Page 5 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, 2000, $141.8 million, or 76.7%, of aggregate consumer and home equity loans was at fixed rates while $43.0 million, or 23.3%, 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, 2000, the Banks had loans with an aggregate principal balance of $39.3 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. Loan Maturities. The following table sets forth contractual maturity ranges of the Company's loan portfolio by loan type as of December 31, 2000. Demand loans having no stated schedule of repayment and no stated maturity and overdrafts are reported as due in one year or less.
After One Within but Within After One Year Five Years Five Years Total -------- ---------- ---------- ----- (in thousands) Commercial..................... $ 79,230 $ 58,644 $ 31,958 $169,832 Commercial real estate......... 4,914 17,917 143,294 166,125 Agricultural................... 40,990 39,754 84,623 165,367 Residential real estate........ 4,980 14,443 182,046 201,469 Consumer and home equity....... 11,924 115,447 57,374 184,745 -------- -------- -------- -------- Total........................ $142,038 $246,205 $499,295 $887,538 ======== ======== ======== ========
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 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. Nonperforming assets increased $1.3 million to $8.0 million at December 31, 2000 compared to the prior year. The increase in nonperforming assets is principally attributed to higher levels of nonaccruing agricultural loans, a result of commmodity price softness in the dairy industry during 2000. The overall level of nonperforming assets as a percentage of total loans and other real estate was 0.91% at December 31, 2000, comparable to 0.88% at December 31, 1999. - -------------------------------------------------------------------------------- Page 6 The following table presents information regarding nonperforming assets at December 31, 2000:
(dollars in thousands) Nonaccruing loans(1): Commercial........................................................... $ 1,044 Commercial real estate............................................... 1,619 Agricultural......................................................... 2,881 Residential real estate.............................................. 835 Consumer and home equity............................................. 217 ------- Total nonaccruing loans............................................ 6,596 Accruing loans 90 days or more delinquent.............................. 521 ------- Total nonperforming loans.......................................... 7,117 Other real estate owned(2)............................................. 932 ------- Total nonperforming assets....................................... 8,049 Less: government guaranteed portion of nonperforming loans............ 1,601 ------- Total nonperforming assets, net of government guaranteed portion....... $ 6,448 ======= Nonperforming loans to total loans..................................... 0.80% ======= Nonperforming loans, net of government guaranteed portion, to total loans(3) .................................................... 0.62% ======= Nonperforming assets to total loans and other real estate.............. 0.91% ======= Nonperforming assets, net of government guaranteed portion, to total loans and other real estate.......................................... 0.73% =======
- ---------- (1) Loans are placed on nonaccrual status when they become 90 days past due if they have been identified as presenting uncertainty with respect to the collectibility of interest or principal. (2) Other real estate owned balances are shown net of related allowances. (3) Nonperforming loans, net of government guaranteed portion, is total nonperforming loans less the portion of the principal amount of all nonperforming loans that is guaranteed by the SBA or FSA. The following table summarizes the loan delinquencies (excluding nonaccrual) in the loan portfolio as of December 31, 2000: 60-89 90 Days Days or More ------ ------- (dollars in thousands) Commercial......................................... $299 $411 Commercial real estate............................. 343 1 Agricultural....................................... 23 -- Residential real estate............................ 798 -- Consumer and home equity........................... 718 109 ------ ----- Total........................................... $2,181 $521 ====== ===== Delinquent loans to total loans.................... 0.25% 0.06% ====== ===== - -------------------------------------------------------------------------------- Page 7 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 require reserves greater than those allocated according to their classification or delinquency status may be established. An allowance is also established for each loan type 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 policy. This policy dictates that investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets and desired risk parameters. In pursuing these objectives, the Company considers the ability of 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 treasurer of each subsidiary bank is responsible for securities portfolio decisions within the established policies, with review and oversight provided by each bank's asset/liability committee. The Company's investment securities strategy centers on providing liquidity to meet loan demand and deposit withdrawal activity, meeting pledging requirements, managing overall interest rate risk and maximizing portfolio yield. Subsidiary bank policies generally limit security purchases to: - -------------------------------------------------------------------------------- Page 8 o U.S. Treasury securities; o U.S. government agency securities; o pass-through mortgage-backed securities and collateralized mortgage obligations (CMOs) issued by the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA) and Freddie Mac; 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 inception 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 have historically been additional sources of funds. Deposits. The Company 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 Company's deposits are obtained predominantly from the areas in which the Banks' branch offices are located. The Company relies primarily on competitive pricing of its deposit products, customer service and long-standing relationships with customers to attract and retain these deposits. During 2000, the Banks began to utilize brokered certificates of deposit as an alternative funding source in response to the continued loan growth. Borrowed Funds. Borrowings consist primarily of advances entered into with the FHLB and repurchase agreements. The Company expects to utilize borrowings as a source of funding the continued loan growth. REGULATION The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, the deposit insurance funds - -------------------------------------------------------------------------------- Page 9 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. 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. 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 nonbanking 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 - -------------------------------------------------------------------------------- Page 10 "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, 2000, the Company's ratio of Tier 1 capital to total risk-weighted assets was 14.02% and the ratio of total capital to total risk-weighted assets was 15.27%. 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 its average total 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, 2000, the Company's leverage ratio was 10.19%. 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. 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 - -------------------------------------------------------------------------------- Page 11 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 acquiror 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) is a national bank chartered by the Office of the Comptroller of Currency. All of the deposits of the four 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 NBG). 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 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, - -------------------------------------------------------------------------------- Page 12 including any depository institution holding company (such as us) 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), 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. For institutions with total assets of more than $3 billion, independent auditors may be required to review quarterly financial statements. The FDIC Improvement Act of 1991 requires that independent audit committees be formed, consisting of outside directors only. The committees of such institutions 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, 2000, the ratio of Tier 1 capital to total risk-weighted assets for the Banks was 8.93% for WCB, 10.32% for NBG, 8.91% for PSB and 9.19% for FTB, and the ratio of total capital to total risk-weighted assets was 10.18% for WCB, 11.57% for NBG, 10.16% for PSB and 10.44% 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, 2000, the ratio of Tier 1 capital to average total assets (leverage ratio) was 6.19% for WCB, 8.02% for NBG, 6.46% for PSB and 5.93% for FTB. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 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 - -------------------------------------------------------------------------------- Page 13 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 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 - -------------------------------------------------------------------------------- Page 14 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 and the Fair Housing 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. Instability of Regulatory Structure Various legislation is introduced in Congress from time to time that includes proposals to overhaul the bank regulatory system, expand the powers of banking institutions and bank holding companies and limit the investments that a depository institution may make with insured funds. The Gramm-Leach-Bliley Act ("Gramm-Leach") was signed into law on November 12, 1999. Gramm-Leach enables 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. Expanding Enforcement Authority One of the major additional burdens imposed on the banking industry by the FDIC Improvement Act is the increased ability of banking regulators to monitor the activities of banks and their holding companies. In addition, 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. - -------------------------------------------------------------------------------- Page 15 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. 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:
LOCATION TYPE OF LEASED OR EXPIRATION 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 2001 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 -- Canandaigua............................... Branch Own -- Seneca County............................. Branch Own -- Penn Yan.................................. Branch Own -- Waterloo (Plaza).......................... Branch Ground Lease December 2016 Ovid...................................... Branch Own -- The Pavilion State Bank Pavilion.................................. Main Office Own -- Caledonia................................. Branch Lease April 2006 Leroy..................................... Branch Own -- Batavia In-Store.......................... Branch Lease August 2008 Batavia................................... Branch Lease October 2001 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
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 - -------------------------------------------------------------------------------- Page 16 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, 2000 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 2, 2001, the Company had 10,986,721 shares of common stock outstanding (exclusive of treasury shares) and had approximately 1,800 shareholders of record. The high and low prices listed below represent actual sales transactions as reported by Nasdaq. Cash Sales Price Dividends High Low Declared ------- ------- -------- 1999 Second Quarter * $15.625 $14.000 $ -- Third Quarter 15.500 12.250 0.08 Fourth Quarter 14.625 12.000 0.08 2000 First Quarter 13.250 10.375 0.10 Second Quarter 15.000 11.938 0.10 Third Quarter 15.438 12.375 0.11 Fourth Quarter 15.375 13.375 0.11 * Second quarter 1999 includes June 25, 1999, the date the Company commenced trading on Nasdaq, through June 30, 1999. ITEM 6. SELECTED FINANCIAL DATA
DECEMBER 31 ------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- -------- (IN THOUSANDS) SELECTED FINANCIAL CONDITION DATA: Total assets........................ $1,289,327 $1,136,460 $976,185 $880,512 $802,266 Loans, net.......................... 873,262 752,324 645,857 594,332 545,060 Securities available for sale....... 261,869 200,272 157,022 110,123 83,731 Securities held to maturity......... 76,947 81,356 91,016 99,084 106,112 Deposits............................ 1,078,111 949,531 850,455 767,726 707,703 Borrowed funds...................... 62,384 56,336 13,862 12,066 5,814 Shareholders' equity 131,618 117,539 96,578 86,843 77,254 YEARS ENDED DECEMBER 31 ------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- -------- (IN THOUSANDS) SELECTED OPERATIONS DATA: Interest income..................... $ 96,781 $ 78,899 $ 72,870 $ 67,168 $ 61,192 Interest expense.................... 43,605 31,883 30,958 27,851 24,514 --------- --------- --------- --------- -------- Net interest income............... 53,176 47,016 41,912 39,317 36,678 Provision for loan losses........... 4,211 3,062 2,732 2,829 1,740 --------- --------- --------- --------- --------- Net interest income after provision for loan losses......... 48,965 43,954 39,180 36,488 34,938
- -------------------------------------------------------------------------------- Page 17 Noninterest income.................. 9,095 7,848 6,381 5,733 5,165 Noninterest expense ................ 30,156 27,032 24,602 22,084 19,796 --------- --------- -------- --------- -------- Income before income taxes.......... 27,904 24,770 20,959 20,137 20,307 Income taxes........................ 9,804 8,813 7,354 7,295 7,232 --------- --------- -------- --------- -------- Net income.......................... $ 18,100 $ 15,957 $ 13,605 $ 12,842 $ 13,075 ========= ========= ======== ========= ========
AT OR FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- PER COMMON SHARE DATA: Net income ............ $ 1.51 $ 1.38 $ 1.22 $ 1.14 $ 1.16 Cash dividends declared 0.42 0.31 0.26 0.22 0.20 Book value ............ 10.36 9.05 7.94 6.94 5.96 Market value .......... 13.61 12.12 -- -- -- AT OR FOR THE YEAR ENDED DECEMBER 31 -------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- SELECTED FINANCIAL RATIOS AND OTHER DATA (1): PERFORMANCE RATIOS: Return on common equity (ratio of net income to average common equity) .......... 15.78 16.16 16.28 17.62 20.86 Return on assets (ratio of net income to average total assets) .......... 1.51% 1.54% 1.48% 1.54% 1.71% Common dividend payout ...................... 27.81 22.54 21.43 19.28 16.77 Net interest rate spread .................... 3.98 4.19 4.24 4.43 4.56 Net interest margin (2) .................... 4.88 5.00 5.06 5.21 5.31 Efficiency ratio ............................ 46.32 47.03 48.31 47.02 45.47 Noninterest income to average total assets (3) .................. 0.76 0.75 0.69 0.69 0.68 Noninterest expenses to average total assets 2.52 2.61 2.68 2.65 2.59 Average interest-earning assets to average interest-bearing liabilities .. 123.66 124.86 123.05 121.91 121.89 ASSET QUALITY RATIOS: Excluding impact of government guarantees Non-performing loans to total loans ......... 0.80% 0.75% 0.93% 1.24% 1.06% Non-performing assets to total loans and other real estate ............... 0.91 0.88 1.24 1.62 1.38 Allowance for loan losses to non- performing loans .......................... 195.06 198.83 156.86 108.95 121.51 Allowance for loan losses to total loans .... 1.56 1.50 1.46 1.35 1.29 Net charge-offs during the period to average loans outstanding during the year ...................................... 0.21 0.17 0.21 0.32 0.16 Including impact of government guarantees Non-performing loans to total loans ......... 0.62% 0.66% 0.71% 1.00% 0.79% Non-performing assets to total loans and other real estate ............... 0.73 0.78 1.03 1.38 1.12 CAPITAL RATIOS: Equity to total assets ...................... 10.21% 10.34% 9.89% 9.86% 9.63% Average common equity to average assets ............................ 8.78 8.63 8.09 7.70 7.25 OTHER DATA: Number of full-service offices .............. 32 29 28 27 24 Loans serviced for others (in millions) ..... $ 205.2 $ 200.2 $ 177.8 $ 153.2 $ 134.9 Full time equivalent employees .............. 441 411 384 383 380
(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. - -------------------------------------------------------------------------------- Page 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information regarding Management's Discussion and Analysis of Financial Condition and Results of Operations of Financial Institutions, Inc. and subsidiaries is contained in pages 16 through 30 of the Registrant's 2000 Annual Report to Shareholders filed herewith as Exhibit 13, and is incorporated herein by reference thereto. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Information regarding Quantitative and Qualitative Disclosure About Market Risk of Financial Institutions, Inc. and subsidiaries is contained in pages 28 through 30 of the Registrant's 2000 Annual Report to Shareholders filed herewith as Exhibit 13, and is incorporated herein by reference thereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information regarding the consolidated financial statements of Financial Institutions, Inc. and subsidiaries is contained in pages 32 through 50 of the Registrant's 2000 Annual Report to Shareholders filed herewith as Exhibit 13, and is incorporated herein by reference thereto. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT Information regarding directors and certain executive officers of the Registrant on pages 3, 9 and 12 of the Proxy Statement for its 2001 Annual Meeting of Shareholders 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 6, 7 and 9 of the Registrant's Proxy Statement for its 2001 Annual Meeting of Shareholders 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 pages 3 and 4 of the Registrant's Proxy Statement for its 2001 Annual Meeting of Shareholders 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 2001 Annual Meeting of Shareholders filed with the U.S. Securities and Exchange Commission is incorporated herein by reference thereto. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of Documents Filed as Part of this Report - -------------------------------------------------------------------------------- Page 19 (1) Financial Statements. The financial statements listed below and the Independent Auditors' Report are incorporated herein by reference to the Registrant's Annual Report to Shareholders for the year ended December 31, 2000 in Item 8. Page references are to the Annual Report.
Financial Statements Page Reference -------------------- -------------- Financial Institutions, Inc. and Subsidiaries Independent Auditors' Report 31 Consolidated Statements of Financial Condition 32 Consolidated Statements of Income 33 Consolidated Statements of Changes in Shareholders' 34 Equity and Comprehensive Income Consolidated Statements of Cash Flows 35 Notes to Consolidated Financial Statements 36-49
(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. (3) Exhibits. A list of the Exhibits to this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits. (b) Reports on Form 8-K (1) The Company filed a Current Report on Form 8-K dated November 2, 2000, which disclosed that it had reached an agreement to acquire Bath National Corporation and its banking subsidiary, Bath National Bank. (2) The Company filed a Current Report on Form 8-K dated November 13, 2000, which disclosed that its President and CEO would be a participating speaker at the Ryan, Beck & Co. and CIBC World Markets Investor Conferences. (c) Exhibits The exhibits listed below are filed herewith or are incorporated by reference to other filings. Exhibit Index to Form 10-K -------------------------- Exhibit 3.1 Articles of Incorporation ** Exhibit 3.2 Bylaws ** Exhibit 10.1 1999 Management Stock Incentive Plan *** Exhibit 10.2 1999 Directors' Stock Incentive Plan *** Exhibit 10.3 Employment Agreement-Peter G. Humphrey *** Exhibit 10.4 Employment Agreement-Jon J. Cooper *** - -------------------------------------------------------------------------------- Page 20 Exhibit 10.5 Employment Agreement-Thomas L. Kime *** Exhibit 10.6 Employment Agreement-W.J. Humphrey III *** Exhibit 10.7 Employment Agreement-Randolph C. Brown *** Exhibit 13 Annual Report to Shareholders for the year ended December 31, 2000 Exhibit 21 Subsidiaries of Financial Institutions, Inc. Exhibit 23 Independent Accountants' Consent Exhibit 27.1 Financial Data Schedule - Fiscal Year End 2000 **Incorporated by reference from Financial Institutions, Inc., Form S-1, filed on June 11, 1999. *** Incorporated by reference to the corresponding exhibit filed with the Registrant's 1999 Annual Report on Form 10-K filed on March 28, 2000. - -------------------------------------------------------------------------------- Page 21 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 , 2001 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 President, Chief March 29, 2001 Executive Officer (Principal - ----------------------- Executive Officer) and Director Peter G. Humphrey /s/ John R. Koelmel Senior Vice President March 29, 2001 and Chief Administrative Officer - ----------------------- John R. Koelmel /s/ Ronald A. Miller Senior Vice President March 29, 2001 and Chief Financial Officer - ---------------------- (Principal Accounting Officer) Ronald A. Miller /s/ W.J. Humphrey, Jr. Director and March 29, 2001 Chairman of the Board - -------------------- W. J. Humphrey, Jr. /s/ W.J. Humphrey, III Director and March 29, 2001 Senior Vice President - ----------------------- W. J. Humphrey, III /s/ Jon J. Cooper Director and March 29, 2001 Senior Vice President - ------------------- Jon J. Cooper /s/ Barton P. Dambra Director March 29, 2001 - ------------------- Barton P. Dambra - -------------------------------------------------------------------------------- Page 22 /s/ Samuel M. Gullo Director March 29, 2001 - ------------------- Samuel M. Gullo /s/ Thomas L. Kime Director and March 29, 2001 Senior Vice President - ------------------- Thomas L. Kime /s/ H. Jack South. Director March 29, 2001 - ------------------- H. Jack South /s/ John Tyler, Jr. Director March 29, 2001 - ------------------- John Tyler, Jr. /s/ Bryan G. vonHahmann Director March 29, 2001 - ------------------- Bryan G. vonHahmann /s/ James H. Wycoff Director March 29, 2001 - ------------------- PageJames H. Wycoff - -------------------------------------------------------------------------------- 23 EX-13 2 0002.txt EXHIBIT 13 EX-13 (Exhibit 13) Annual Report to Shareholders for the year ended December 31, 2000 FINANCIAL INSTITUTIONS, INC. ANNUAL REPORT 2000 Front Cover The Best of Both Worlds HIGH TECH, HIGH-TOUCH Annual Report 2000 Financial Institutions, Inc. Inside Cover Best of Both Worlds "At FII, our super-community banking strategy enables us to compete effectively against not only local community banks, but also larger regional banks nad other financial services providers. With the benefit of the company's financial strength, operational support and technological expertise, our subsidiary banks are able to offer a product line second to none, grant larger loans than other banks their size and deliver technology-based services otherwise available only from much larger institutions. However, each bank remians independently managed, knows their communities intimately, is responsive to the needs of their customers and delivers superior quality service. This strategy provides our customers with large bank products delivered with community bank service - or the Best of Both Worlds." Peter G. Humphrey President and CEO Office Locations Wyoming County Bank The National Bank of Geneva The Pavilion State Bank First Tier Bank & Trust [map] Mission Statement Financial Institutions, Inc. is a multi-bank holding company that creates and builds a value-driven relationship with its customers, communities, employees and stockholders. We will continue to pursue the super-community banking strategy. - -------------------------------------------------------------------------------- Page 24 Financial Institutions, Inc. Selected Financial Highlights
Dollars in thousands, except per share amounts 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- For the Year Net interest income Fully taxable-equivalent basis $ 55,755 $ 49,165 $ 43,758 $ 40,817 $ 38,143 Provision for loan losses 4,211 3,062 2,732 2,829 1,740 Noninterest income 9,095 7,848 6,381 5,733 5,165 Noninterest expense 30,156 27,032 24,602 22,084 19,796 Net income 18,100 15,957 13,605 12,842 13,075 Preferred dividends 1,496 1,503 1,506 1,513 1,522 Net income available to common shareholders 16,604 14,454 12,099 11,329 11,553 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Per Common Share Net income - basic and diluted $ 1.51 $ 1.38 $ 1.22 $ 1.14 $ 1.16 Cash dividends declared 0.42 0.31 0.26 0.22 0.20 Book value 10.36 9.05 7.94 6.94 5.96 Market value 13.61 12.12 -- -- -- - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- At Year End Assets $1,289,327 $1,136,460 $ 976,185 $ 880,512 $ 802,266 Earning assets 1,227,062 1,057,202 919,943 812,084 744,551 Loans 887,145 763,745 655,427 602,477 552,189 Allowance for loan losses 13,883 11,421 9,570 8,145 7,129 Deposits 1,078,111 949,531 850,455 767,726 707,703 Common equity 113,860 99,727 78,720 68,916 59,202 Shareholders' equity 131,618 117,539 96,578 86,843 77,254 Common shares outstanding 10,987 11,018 9,916 9,928 9,928 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Average Balances Assets $1,197,516 $1,036,461 $ 918,408 $ 834,786 $ 763,789 Earning assets 1,141,381 982,881 864,176 784,073 718,767 Loans 825,953 700,062 621,418 571,877 511,033 Deposits 998,668 888,670 798,954 730,098 677,244 Common equity 105,197 89,460 74,323 64,286 55,375 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Asset quality Allowance for loan losses to loans 1.56% 1.50% 1.46% 1.35% 1.29% Nonperforming assets to loans and other real estate 0.91 0.88 1.24 1.62 1.38 Allowance for loan losses to nonperforming loans 195.06 198.83 156.86 108.95 121.51 Net loan charge-offs to average loans 0.21 0.17 0.21 0.32 0.16 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Key Ratios Return on average common equity 15.78% 16.16% 16.28% 17.62% 20.86% Return on average assets 1.51 1.54 1.48 1.54 1.71 Common dividend payout ratio 27.81 22.54 21.43 19.28 16.77 Net interest margin 4.88 5.00 5.06 5.21 5.31 Efficiency ratio 46.32 47.03 48.31 47.02 45.47 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Capital Ratios Average common equity to average assets 8.78% 8.63% 8.09% 7.70% 7.25% Leverage ratio 10.19 10.80 9.58 9.53 9.05 Tier 1 risk-based capital ratio 14.02 14.94 13.71 13.58 13.25 Risk-based capital ratio 15.27 16.19 14.96 14.81 14.50
1 A Message from the President [photo of president] In 1999, I committed to you that Financial Institutions, Inc. (FII) would embark on a three-pronged growth plan. Our strategy is to increase our share of the markets we currently serve by using more focused sales initiatives, expand the depth of our customer relationships through increased cross-selling of products and services and enter new geographic markets through acquisition or de novo branches. I am pleased to report significant progress has been made in all three of these key areas. In fact, the combination of the benefits of these growth initiatives and the continued successful implementation of our super-community banking strategy has resulted in another record year for FII in 2000. Financial Performance Net income increased to an all-time high of $18.1 million in 2000, up 13% from the previous year. Earnings per share increased 9% over 1999 to $1.51 per share. Return on average common equity was 15.78% in 2000 compared to 16.16% in 1999. At December 31, 2000, FII had total assets of $1.3 billion, an increase of 13% from year-end 1999. Total loans increased to $887 million, or 16%, at year-end. Total deposits increased 14% to $1.1 billion at year-end. The ratio of the allowance for loan losses to total loans was 1.56% at December 31, 2000, up from 1.50% the year before. Our capital position remains strong with a leverage ratio at year-end of 10.19% reflective of our strong earnings history. As a result, the Board of Directors declared common dividends totaling $0.42 per share in 2000, a 35% increase over 1999. Increasing Market Share and Expanding Relationships In 2000, we set out to increase the number of households that do business with FII. I am very excited and pleased to report that household services have increased nearly 5% company wide, with all member banks experiencing growth. We also experienced a similar increase in the number of multiple service households, defined as any household that utilizes two or more of the products or services offered by FII. This success can be attributed to the installation of a Marketing Customer Information File (MCIF) in late 1999. The MCIF system has allowed us to better target our marketing and sales efforts and to better identify customer needs, thereby increasing our chances of sales success. Utilization of the MCIF not only assists us in the acquisition of new customers, but it also allows us to focus on deepening the relationship we have with existing customers. Strengthening our customer relationships is important to the ongoing success of FII as we continue to emphasize our super-community bank value proposition. 2 [photo of Jon Cooper, CEO Wyoming County Bank, Jay Humphrey, CEO The Pavilion State Bank, Peter Humphrey, CEO Financial Institutions, Inc., and Tom Kime, CEO The National Bank of Geneva promoting our expansion into Rochester, New York.] Geographic Expansion In November, we announced we had reached an agreement to acquire our fifth banking subsidiary, Bath National Bank. We believe this transaction is a key next step for our company. In addition to a great strategic fit for FII, Bath has the same community banking philosophy and a tradition of highly responsive customer service. We expect the $62.6 million transaction will close in the second quarter of 2001. Bath National will continue to operate as a separately chartered and managed entity, retaining its senior management team and local Board of Directors. The acquisition will not only enhance our position in Central New York, but will also facilitate our entry into other key markets. Bath has the number one deposit share in Steuben County and will give us access to the expanding Corning market. We will leverage and enhance the Bath National brand with our expanded array of products and services. There also are significant opportunities to leverage our technology infrastructure and administrative support systems to achieve operating efficiencies. While our focus in 2001 will be to integrate Bath's operations, we are confident their operating results will positively impact our financial statements thereafter. In addition to the Bath acquisition, we further expanded our market reach in 2000 by entering the Rochester and Buffalo markets. Following the opening of our first Rochester area office in the suburb of Honeoye Falls in late 1999, The Pavilion State Bank opened a branch office in North Chili, another Rochester suburb, in June of 2000. Both of these offices continue to emphasize our strategy of providing high-quality, personal service and a broad array of financial products. Their performance to date has exceeded expectations. Wyoming County Bank opened our first Buffalo area office, in July of 2000, in the suburb of Williamsville. Our strategy in this market has been to target small businesses as we build our profile and customer base. This strategy has been very effective in the first six months of operations with over $19.7 million in closed loans and $4.3 million in deposits. In January of 2001, The National Bank of Geneva opened our 32nd full-service banking office in Ovid, New York. This office further expands our presence in Seneca County and allows us to better meet the needs of that marketplace. While we continue to explore additional acquisition and expansion opportunities, we are confident our value proposition will maximize our chances of success as we further penetrate these important new markets. [Five graphs] 3 Leveraging the FII Brand Now that we are a public company, we feel it is important to build the FII brand alongside our community bank brands. Throughout the course of the year, we embarked on a communications program to increase customer awareness about the benefits of banking with an FII Bank and the strong relationships among our subsidiary banks. In August of 2000 we created the FII ATM Network, which enables our customers to utilize any of our bank subsidiary ATMs usage-charge free. Our customers now have access to an ATM network unrivaled by our community bank competitors. In December, we further leveraged the customer service benefits of the FII structure by allowing customers to make deposits and withdrawals at any bank subsidiary office location, providing our customers with the convenience of banking at 32 offices throughout Central and Western New York State. These initiatives become increasingly important as we expand our market footprint and customer base. New Products and Services A key benefit of our organizational structure is the ability to provide a broad array of products and services while offering personalized customer service. To further leverage this strength, we continued to enhance our products, services and delivery channels throughout 2000. In September, we began offering Lockbox Payment Processing Services to our business and municipal customers. Use of our lockbox payment processing provides quicker access to funds received and enables the customer to minimize their related in-house administrative efforts. In the first four months of operation, we processed almost 13,000 payments for businesses and municipalities. Consistent with our relationship banking philosophy, we developed and introduced a new retail "Relationship Account." This product rewards our customers for the relationship they have at FII by offering discounts and preferred rates on loans and deposits as well as many other money-saving benefits. We also began offering our customers a combined statement which provides them with a complete picture of the relationship they have with us. We continued to enhance our already robust Internet banking services, NetExpress Teller and NetExpress Business. At year-end, almost 10,000 customers were using NetExpress Teller, our fully functional retail Internet banking service, an increase of 96% over last year. We also experienced significant increases in the use of NetExpress Business, which provides a convenient and efficient cash management tool for small businesses to provide direct payroll deposit, transmit wire transfers, and manage their accounts. As of December 31, 2000, more than 300 customers signed up for this service, a 200% increase over 1999. Increasing Noninterest Income A diversified array of products and services not only provides quality customer service, but also enables us to diversify our sources of income given declining interest margins. Accordingly, we continue to pursue steps to increase our noninterest income as a percentage of total revenue. Our brokerage subsidiary, The FI Group, Inc. (FIGI) began operating in March of 2000. With the transition from a third party provider, we have positioned ourselves to retain a higher portion of the commissions we receive from the sales of mutual funds and annuities. We also now have greater flexibility in the product offerings available to our customers. In 2000, our investment brokerage business generated over $26.6 million in sales and almost $1 million of fee revenue. [photo of the FII Board of Directors] 4 We also continued to expand our trust services. We are committed to aggressively cross-selling these services to our existing customer base. We will also continue to strengthen our relationships with area attorneys and accountants in our business development efforts. While we have been very successful in the launch of our trust services, with $30 million in assets under management, we believe there are significant opportunities ahead. While we continue to explore other nontraditional service opportunities, we remain focused on maximizing our core banking fee income. We installed four new automated teller machines (ATMs) during the year, increasing the total number of machines in the FII network to 41. These ATMs will add to the already significant noninterest income, in the form of usage fees assessed to noncustomers. In 2000, our ATM network produced over $779,000 in noninterest income. Improving the Use of Technology Fortunately, Y2K was a nonevent at FII. In 2000, we continued to actively build the technological infrastructure to support our expanding operations. In April, we enlisted the services of a leading bank technology consultant to assist with the development of a comprehensive technology plan. This plan provides the framework for the future of our technology platforms and will allow us to continue to remain on the leading edge. We are dedicated to enhancing our position as a technological leader, and will continue to leverage and improve our use of technology to exceed our customer's expectations in the most cost-effective manner. Solidifying our Management Team The key to our success continues to be our people. Ensuring that we have the proper management in place to efficiently manage an expanding and more diversified organization is a top priority. To that end, John R. Koelmel joined the Company in July, filling the newly created position of Chief Administrative Officer. As a senior member of our management team, John has already been instrumental in coordinating our strategic planning and mergers and acquisition initiatives, in addition to overseeing the administrative support functions. I am confident that John's addition further strengthens our already impressive team. In November, we also hired Matthew T. Murtha as our Director of Marketing. Matt will work to further improve the way we market our products and services, as well as provide market information and analysis that will be key to developing new product and market entry initiatives. We remain committed to developing the management depth needed to continue to perform at a consistently high level throughout the organization. Thank You I want to thank the shareholders of FII for their continuing support. I would also like to extend my appreciation to the Board of Directors and advisory board members at FII and our subsidiaries for their guidance and support. I would like to recognize the hard work of the many talented and dedicated employees of FII and our subsidiaries. Tremendous teamwork made possible the successes of 2000. Together we are poised for the challenges that lie ahead and are committed to maximizing the benefits of your investment. I am excited and confident about our future. Sincerely, Peter G. Humphrey 5 Wyoming County Bank Wyoming County Bank had a very successful year in 2000, achieving record earnings, expanding into the Buffalo market, launching a new relationship account and revitalizing the bank's trust services. Net income in 2000 increased to a record $7.5 million, up 11% over 1999. Total loans at December 31, 2000 were $347 million, up 14% for the year. This loan growth was, in part, the result of a successful entry into the Buffalo market, where we opened a full-service loan production office in Williamsville in July. By year-end, we had a total of $19.7 million in loans at this new office. The loan growth can also be attributed to a refocused indirect lending program. Throughout the course of the year, the bank forged a relationship with The Dorschel Group, one of the largest auto dealers in the Rochester area, to provide indirect lending services. As a result of that and other dealer relationships, indirect loans increased 44% to $23.9 million. As of December 31, 2000, deposits totaled $422 million, up 11% from 1999. This growth can be largely attributed to our new Honeoye Falls Office, which, at year-end, exceeded $7.4 million in deposits. In an effort to continue to grow deposits in an increasingly competitive market, we launched a new relationship account that rewards customers for the strength of the relationship they have with the bank by offering discounts on loans, preferred rates on deposits and many other benefits. Launched in the fourth quarter, we believe this account helps lay the groundwork for future deposit growth as well as improved customer retention. Noninterest income totaled $3.4 million at year-end, up 21% from the prior year. This growth has been fueled by a combination of deposit account and other financial service fees. We continue to expand our mutual fund and annuity sales through FII's brokerage subsidiary, FIGI. In addition, we are revitalizing our trust services. Through the hard work of our dedicated trust professionals, we had $12.2 million in assets under management at year-end. These initiatives, in combination with our expanding ATM network, provide the framework for continuing growth in noninterest income. We also continued to enhance the services we offer customers. In September, we introduced Lockbox Services to our commercial customers. We continue to enhance and emphasize our Internet banking capabilities, launching a redesigned web site in October. Through this site, customers can now open deposit and loan accounts and can also continue to access their account information through our full-featured Internet service NetExpress Teller. At year-end there were over 3,600 customers using NetExpress Teller. We are confident these new services, combined with our wide array of existing products, further solidifies our position as the bank of choice for not only retail customers, but commercial customers as well. This belief was reaffirmed when the Office of Advocacy of the Small Business Administration ranked us sixth among all banks in New York State for small business friendliness. We also believe that our success relies on our ability to continue to identify and meet the needs of our customers each and every day. To that end, we conducted several customer satisfaction surveys throughout the course of the year. The purpose of the surveys was to listen and respond to the needs of our customers. The surveys have been, and will continue to be, a valuable tool to ensure these needs are met. Most importantly, our tremendous employee team continues to provide quality services in a very cost-effective manner. We pride ourselves on recruiting, training and developing our people to not only serve today's customers, but also to enable us to meet the challenges in the years ahead. 6 Wyoming County Bank [logo] Call out on right side of page: Pictured here is the grand opening of Wyoming County Bank's newest banking office in Williamsville, New York. This office was established as the result of the bank's loan portfolio in Erie County growing to over $21 million in the last two years. Now with its first full-service facility in Erie County, both consumer and small business customers can take advantage of the bank's excellent product line. [photo described above] [photo of Wyoming County Bank Board of Directors] [five graphs] 7 The National Bank of Geneva [logo] Call out on right side of page: The National Bank of Geneva combines the power of technology with the dependable service to which the banks' customers have grown accustomed. This combination was the determining factor as the bank was awarded the exclusive business of the Waterloo, Seneca Falls and Romulus School Districts. Pictured here from left to right are Gary Alger, Business Administrator, Rob Sollenne, Senior Vice President, NBG, Mike Renne, Business Manager, Gloria Mincer, Fiscal Manager, Kathleen Cooper, Office Manager, Larry Driscoll, Assistant Superintendent for Administration, and Jeffrey Friend, Senior Vice President, NBG. [photo described above] [photo of The National Bank of Geneva Bank Board of Directors] [five graphs] 8 The National Bank of Geneva The National Bank of Geneva's highlights in 2000 include another year of record earnings, the opening of our seventh office, further establishing our Trust and Investment services and, for the second consecutive year, receiving the number one ranking for both small business and agricultural lending in all of New York State. Net income for 2000 totaled $7.2 million, an increase of 17% from 1999. Total assets increased 17% to $488 million at year-end. Total loans were up 15% during the year to $334 million at December 31, 2000. This exceptional loan growth can once again be attributed to our lenders' commitment to enhancing the quality of life in the communities in which we live and work. During the year we also added several experienced professionals to our already exceptional lending team. Our commitment to investing in our marketplace prompted a partnership between the bank and representatives of Seneca County, which for the second consecutive year, successfully submitted loan applications to the U.S. Department of Housing and Urban Development. These loans assist local businesses and provide immediate benefit to the community. We are also pleased to report that, for the second consecutive year, we were ranked the number one bank in New York State for both small business lending and agricultural lending by the Office of Advocacy of the U.S. Small Business Administration. We are proud of this achievement and believe it reinforces our commitment to providing exceptional service to our customers. Total deposits at the end of 2000 were $411 million, an increase of 15% from the prior year. This increase is a direct result of the focused business development efforts of our entire organization. This focus was rewarded in the Spring when we competed for and were selected to be the sole financial services provider for the Romulus, Seneca Falls and Waterloo school districts. These relationships brought over $20 million in deposits to the bank. We also set the framework for future deposit growth by opening our second Seneca County office and seventh full-service banking office in Ovid, New York. This new office will allow us to take advantage of the impending growth in that area as well as expanding our service area. We also experienced significant growth in noninterest income in 2000, which increased during the year to $3.4 million. A portion of that increase is attributable to a dramatic expansion of our trust services during the year. The addition of an additional trust professional in 2001 is expected to further spur our growth. At December 31, 2000, we had over $14.9 million in assets under management which provided $125,000 of fee income for the year. Combined with our experienced Investment Consultants, who generated more than $7.0 million in mutual fund and annuities sales, investment management services has quickly become a significant component of noninterest income. While proud of our accomplishments this year, we anxiously look forward to an exciting 2001. In addition to actively supporting the integration of Bath National Bank into the FII family, we expect to continue to expand our own market reach, further strengthen our customer relationships and continue to profitably grow. The NBG team is second to none and is well prepared to sustain our record of strong performance. 9 The Pavilion State Bank At The Pavilion State Bank, we continue to effectively compete against larger regional and money center banks. Our accomplishments in 2000 include the opening of another new branch office, the expansion of our ATM network, the reorganization of the commercial lending support area and the establishment of a trust department. Our financial results were again solid; the bank achieved net income of $2.0 million in 2000. Total loans increased to $123 million at December 31, 2000, up 23% from year-end 1999. The increase was the result of the efforts and expertise of our seasoned lending staff. In addition, the reorganization of the commercial loan support area allowed the lending staff to further concentrate their efforts on new business development. The bank also initiated a new customer contact program, which allows lending staff to better monitor and track calling efforts. Total deposits increased 17% at year-end to $143 million. This deposit growth is the direct result of the opening of our sixth full-service banking office in the Rochester suburb of North Chili. In the first six months of operation, this office has gathered over $4.4 million in core deposits. Deposit growth was also influenced by our continued emphasis on the Batavia market, as we continue to increase our share of that market while retaining our share of our other markets. Noninterest income was $1.2 million in 2000, up 6% excluding a gain on sale of assets of $171,000 in 1999. The improvement was driven by fee income from our increasing deposit base as well as the benefits of two new automated teller machines in the North Chili area. To enable us to provide more complete investment management and advisory services, as well as lay the groundwork for future noninterest income growth, the bank obtained trust powers from the FDIC and the New York State Banking Department in 2000. The bank has retained a qualified trust professional to oversee this operation, and we are confident that the combination of trust and investment advisory services will further enhance noninterest income while solidifying the relationship we have with our customers. Late in 2000, we were pleased to launch a redesigned, state-of-the-art web site. Through this site, our customers can learn more about our products and services, apply for deposit and loan accounts, access credit card information and access their accounts through NetExpress Teller. The new site has been well received by customers and has helped to fuel a 122% increase in NetExpress Teller users to over 1,400 customers. We remain committed to the efficient use of technology as we strive to further solidify our position as the premier financial services provider in our markets. Throughout the course of the year, we conducted several customer satisfaction surveys to identify and meet the needs of our customers. We are committed to listening to our customers so as to provide the best service possible. In response to survey feedback, we modified our office hours, expanding our weekend and evening hours to better serve our customers. We anxiously look forward to building on our accomplishments and strong results in 2000 as we begin 2001. Our growth initiatives in both the core businesses as well as in investment management and advisory services position us well for continued success. Our terrific employee team will enable us to continue to provide high-quality customer service as we expand into new markets and provide the range of services necessary to remain competitive. Our many thanks go out to Robert Milligan, who left the PSB Board of Directors after many dedicated years of service. His guidance and knowledge will be missed. Richard Buckley has graduated from our advisory board ranks and has been added to the Board in Mr. Milligan's place. 10 The Pavilion State Bank [logo] Call out on left side of page: One of the benefits of The Pavilion State Bank's affiliation with FII is the ability to offer products and services traditionally offered only by larger regional banks. One way we do this is through an expanded ATM network involving PSB and its sister banks. Pictured here is Dr. William Crothers, President, Roberts Wesleyan College, making a deposit at one of 41 usage-charge free ATM locations in Western and Central New York. [photo described above] [photo of The Pavilion State Bank Board of Directors] [five graphs] 11 First Tier Bank & Trust [logo] Call out on right side of page: Being a member of FII allows First Tier Bank & Trust many advantages over our competition, including a sophisticated product line even larger banks would envy. NetExpress Business, our Internet Cash Management service, is one of those products. Pictured here using NetExpress Business to conduct a wire transfer is Joseph Keller, Cattaraugus County Treasurer and Michael Krysick, First Tier Bank & Trust. [photo described above] [photo of First Tier Bank & Trust Board of Directors] [five graphs] 12 First Tier Bank & Trust First Tier Bank & Trust once again completed a strong year in 2000. The bank achieved record earnings and continued to increase market share. The establishment of an indirect lending program, an enhanced commercial lending function and the relocation of our administrative offices to Olean contributed to that success. Net income rose to $1.5 million in 2000, an 11% increase from 1999. Total loans were $83 million at December 31, 2000, up 20% over the prior year. This tremendous loan growth can be attributed to an enhanced commercial lending function and the initiation of an indirect lending program. In addition to adding qualified staff, our commercial lenders continued to utilize their intimate knowledge of our communities to provide superior and quality service to customers. Our indirect program has been very successful in its first year, with more than $8 million in loans outstanding at year-end. We have established a strong dealer network and look to build on those relationships in the year ahead. Total deposits grew 12% to $119 million at year-end 2000. We continued to focus on increasing market share in all of the markets in which we do business, to solidify the First Tier name and to lay the groundwork for future expansion in the southern tier. Noninterest income increased 11% to $961,000 in 2000. This growth was fueled by fee income from our increasing deposit base as well as from our trust and investment management business. Also, brokerage services offered through our sister company, The FI Group, Inc., will be an important component in our continuing efforts to increase noninterest income. As a result of favorable comments received during customer focus groups conducted regarding our Internet efforts, we launched a redesigned web site in late 2000. This site provides customers with the ability to more conveniently conduct their banking with First Tier. We are proud of our Internet services, and we remain committed to providing customers with convenient services through this revolutionary medium. Our efforts to date have been rewarded as we have signed up almost 900 customers for our Internet banking service, NetExpress Teller, launched in 1999. We are also pleased with the suggestions received through our customer satisfaction survey process, which form the basis of a large number of our initiatives in the coming year, all in an effort to continue to meet the needs of our customers each and every day. As we continue to grow market share in Olean, we made the decision to relocate our administrative offices to that market. This move has better allowed the bank to put into place the infrastructure necessary to support future growth. While we recognize the importance of the Olean market to our future, we equally recognize the importance of our continuing strong presence in Salamanca and our other markets. We remain committed to these markets and will continue to provide the products and services to which our customers have grown accustomed. Our achievements in 2000 provide a terrific foundation for more growth and success in 2001. Our expanded presence in Olean should enable us to better develop customer relationships and increase our share of both loans and deposits in that market. Our lending initiatives position us well to continue to grow that portfolio profitably. Our trust and investment advisory business infrastructure can now be leveraged for significant growth. The First Tier team is ready to aggressively move forward and looks ahead to an exciting 2001. 13 The FI Group Incorporated In 2000, FII formed The FI Group, Inc. (FIGI), an investment brokerage subsidiary to provide member banks with another vehicle for meeting customer needs. FIGI enjoyed many successes throughout the year. In addition to becoming a member of the NASD, FIGI provided FII with additional noninterest fee income, offered new products and services and established a renewed emphasis on financial planning. Our investment brokerage business earned fees of $960,000 in 2000. That income resulted from almost $27 million in sales of investment products. These results reflect the experience and professionalism of our qualified investment team. During the year, FIGI added a new Investment Consultant due to the high demand created by FII's entrance into the Rochester market. We are confident we will capitalize on the opportunities presented by this expansion. The introduction of several new products has also positively impacted fee income. In August, we entered into an agreement with John Hancock to sell long-term care insurance. We have also teamed with Fidelity to begin offering a 401(k) product to small businesses. These products will allow us to generate ongoing revenue streams as we focus our efforts on key segments of our customer base. A key to our investment philosophy is our focus on financial planning. By actively listening to our customers' needs, we assist them in the development of a blueprint for their financial future. We team with our customers to achieve their goals, building relationships that last a lifetime. As we look forward to 2001 and our first full year of business, we are confident we will build on the success of 2000 to further leverage the trusted customer relationships we have established over the years to more fully identify and serve their investment needs. 14 The FI Group [logo] Callout on left side of page: In the financial services industry, the trend has been to move away from the personal service of yesteryear. At The FI Group, we believe our future rests on our ability to build trusting and rewarding relationships with our clients. Working together to achieve their goals ensures that we can achieve ours. Pictured here is Donald Bouchard, FIGI Investment Consultant of the Year, 1999, and Gary Carlsen, one of his many valued clients. [photo described above] [photo of The FI Group Board of Directors] 15 Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Net income in 2000 was $18.1 million, or 13% more than the $16.0 million earned in 1999. In 1998, net income was $13.6 million. Basic and diluted earnings per share for the year ended December 31, 2000 was $1.51, compared to $1.38 in 1999 and $1.22 in 1998. Our return on average assets in 2000 of 1.51% compares to 1.54% in 1999 and 1.48% in 1998. The return on average common equity in 2000 was 15.78%, compared to 16.16% in 1999 and 16.28% in 1998. Net interest income increased 13% in 2000 and 12% in 1999. These increases are primarily attributable to an increase in average loans of 18% in 2000 and 13% in 1999. Funding the loan growth has been an increasing challenge the last two years. While core deposits have increased, the rate of growth has been insufficient to meet the loan demand. Accordingly, the Company has utilized brokered deposits and other borrowings as additional funding sources. The cost of these higher rate funds has contributed to the decrease in net interest margin in both 2000 and 1999. Accordingly, the Company continues to emphasize fee income. During the last two years, noninterest income has increased by an average of 20%. This increase reflects the benefit of the growth in core deposits and the resulting service fees, as well as an increase in brokerage, insurance and trust income. The Company's growth has also resulted in increases in noninterest expenses to support expanded lending activities, product lines and delivery channels. However, resources continue to be leveraged in a very cost efficient manner. The Company's efficiency ratio further improved to 46.3% in 2000, from 47.0% in 1999 and 48.3% in 1998. 16 LENDING ACTIVITIES Set forth below is selected information concerning the composition of the Company's loan portfolio.
At December 31 ------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- (Dollars in thousands) Commercial .............. $ 169,832 $ 140,376 $ 117,750 $ 105,811 $ 100,854 Commercial real estate .. 166,125 137,694 106,948 99,273 98,118 Agricultural ............ 165,367 151,534 123,754 107,546 86,674 Residential real estate . 201,469 189,466 182,177 170,736 157,490 Consumer and home equity 184,745 145,038 125,198 119,506 109,456 --------- --------- --------- --------- --------- Total loans, gross .... 887,538 764,108 655,827 602,872 552,592 --------- --------- --------- --------- --------- Net deferred fees ....... (393) (363) (400) (395) (403) Allowance for loan losses (13,883) (11,421) (9,570) (8,145) (7,129) --------- --------- --------- --------- --------- Total loans, net ....... $ 873,262 $ 752,324 $ 645,857 $ 594,332 $ 545,060 ========= ========= ========= ========= =========
Total loans increased to $887.5 million at December 31, 2000 from $764.1 million at December 31, 1999, an increase of $123.4 million or 16.2%. Commercial loans increased $29.5 million or 21.0%, while commercial real estate loans increased by $28.4 million or 20.6%. At December 31, 2000, commercial loans totaled $169.9 million, representing 19.2% of total loans, and commercial real estate loans totaled $166.1 million, representing 18.7% of total loans. At December 31, 2000, agricultural loans, which include agricultural real estate loans, represented 18.6% of the total loan portfolio. During 2000, agricultural loans increased by $13.8 million, or 9.1%, to $165.4 million. As of December 31, 2000, residential real estate loans had grown by $12.0 million or 6.3% from December 31, 1999, and totaled $201.5 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. The Company also offers a broad range of consumer loan 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 with outstanding balances of $77.2 million at December 31, 2000, an increase of $28.5 million from the prior year end. Total loans increased to $764.1 million at December 31, 1999 from $655.8 million at December 31, 1998, representing an increase of $108.3 million or 16.5%. In 1999, commercial loans increased $22.6 million or 19.2%, while commercial real estate loans increased by $30.7 million or 28.7%. At December 31, 1999, commercial loans totaled $140.4 million, representing 18.4% of total loans, and commercial real estate loans totaled $137.7 million, representing 18.0% of total loans. At December 31, 1999, agricultural loans, which include agricultural real estate loans, represented 19.8% of the total loan portfolio. During 1999, agricultural loans increased by $27.8 million, or 22.4%, to $151.5 million. As of December 31, 1999, residential real estate loans had grown by $7.3 million or 4.0% from December 31, 1998, and totaled $189.5 million or 24.8% of the total loan portfolio. Consumer and home equity loans grew by $19.8 million, or 15.8%, during 1999 and ended 1999 at $145.0 million, representing 19.0% of the total loan portfolio. 17 Nonaccruing Loans and Nonperforming Assets Nonperforming assets increased $1.3 million to $8.0 million at December 31, 2000 compared to the prior year. The increase in nonperforming assets is principally attributed to higher levels of nonaccruing agricultural loans, a result of commmodity price softness in the dairy industry during 2000. The overall level of nonperforming assets as a percentage of total loans and other real estate was 0.91% at December 31, 2000 comparable to 0.88% at December 31, 1999. The following table sets forth information regarding nonaccruing loans and other nonperforming assets.
At December 31 ---------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ (Dollars in thousands) Nonaccruing loans (1): Commercial ............................... $1,044 $1,159 $1,250 $ 970 $1,048 Commercial real estate ................... 1,619 1,373 995 1,648 1,877 Agricultural ............................. 2,881 1,455 2,340 2,669 1,218 Residential real estate .................. 835 413 733 1,325 679 Consumer and home equity ................. 217 375 423 431 517 ------ ------ ------ ------ ------ Total Nonaccruing loans ................ 6,596 4,775 5,741 7,043 5,339 Accruing loans 90 days or more delinquent ... 521 969 360 433 528 ------ ------ ------ ------ ------ Total nonperforming loans ................... 7,117 5,744 6,101 7,476 5,867 Other real estate owned (2) ................. 932 969 2,084 2,309 1,801 ------ ------ ------ ------ ------ Total nonperforming assets .................. 8,049 6,713 8,185 9,785 7,668 Less: government guaranteed portion of nonperforming loans .................. 1,601 734 1,421 1,428 1,478 ------ ------ ------ ------ ------ Total nonperforming assets, net of government guaranteed portion (3) ....... $6,448 $5,979 $6,764 $8,357 $6,190 ====== ====== ====== ====== ====== Total nonperforming loans to total loans ..................................... 0.80% 0.75% 0.93% 1.24% 1.06% ====== ====== ====== ====== ====== Total nonperforming loans, net of government guaranteed portion, to total loans ........ 0.62% 0.66% 0.71% 1.00% 0.79% ====== ====== ====== ====== ====== Total nonperforming assets to total loans and other real estate ..................... 0.91% 0.88% 1.24% 1.62% 1.38% ====== ====== ====== ====== ====== Total nonperforming assets, net of government guaranteed portion, to total loans and other real estate ......................... 0.73% 0.78% 1.03% 1.38% 1.12% ====== ====== ====== ====== ======
(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. (2) Other real estate owned balances are shown net of related allowances. (3) Nonperforming loans, net of government guaranteed portion, is total non-performing loans less the portion of the principal amount of all nonperforming loans that is guaranteed by the Small Business Administration (SBA) or Farm Service Agency (FSA). 18 Analysis of the Allowance for Loan Losses The allowance for loan losses represents the amount available for credit losses inherent in the Company's loan portfolio. The Company performs periodic, systematic reviews of its 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. Portions of the allowance for loan losses are 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 adequate at December 31, 2000. At December 31, 2000, the Company's allowance for loan losses totaled $13.9 million, an increase of $2.5 million over the previous year end. The allowance as a percentage of total loans was 1.56% at December 31, 2000, compared to 1.50% in 1999. The allowance as a percentage of total nonperforming loans was 195.06% at December 31, 2000, compared to 198.83% at December 31, 1999. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.
December 31 --------------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- (Dollars in thousands) Balance at beginning of year ....... $11,421 $ 9,570 $ 8,145 $ 7,129 $ 6,183 Charge-offs: Commercial ...................... 466 312 263 500 154 Commercial real estate .......... 629 139 687 746 237 Agricultural .................... 85 12 19 -- 74 Residential real estate ......... 113 461 215 131 146 Consumer and home equity ........ 905 663 488 620 321 ------- ------- ------- ------- ------- Total charge-offs ............. 2,198 1,587 1,672 1,997 932 ------- ------- ------- ------- ------- Recoveries: Commercial ...................... 206 88 106 12 3 Commercial real estate .......... 22 23 84 18 35 Agricultural .................... 1 -- -- 1 -- Residential real estate ......... 5 163 42 26 2 Consumer and home equity ........ 215 102 133 127 98 ------- ------- ------- ------- ------- Total recoveries .............. 449 376 365 184 138 ------- ------- ------- ------- ------- Net charge-offs .................... 1,749 1,211 1,307 1,813 794 Provision for loan losses .......... 4,211 3,062 2,732 2,829 1,740 ------- ------- ------- ------- ------- Balance at end of year ............. $13,883 $11,421 $ 9,570 $ 8,145 $ 7,129 ======= ======= ======= ======= ======= Ratio of net charge-offs during the year to average loans outstanding during the year ..... 0.21% 0.17% 0.21% 0.32% 0.16% ======= ======= ======= ======= ======= Ratio of allowance for loan losses to total loans .................. 1.56% 1.50% 1.46% 1.35% 1.29% ======= ======= ======= ======= ======= Ratio of allowance for loan losses to nonperforming loans .......... 195.06% 198.83% 156.86% 108.95% 121.51% ======= ======= ======= ======= ======= Ratio of allowance for loan losses to nonperforming loans, net of government guaranteed portion (1) 251.69% 227.97% 204.49% 134.67% 162.43% ======= ======= ======= ======= =======
(1) Nonperforming loans, net of government guaranteed portion, is total nonperforming loans less the portion of the principal amount of all nonperforming loans that is guaranteed by the SBA or FSA. 19 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 ------------------------------------------------------------------------------ 2000 1999 1998 ------------------------ ----------------------- ------------------------ Percent Percent Percent Of Loans Of Loans Of Loans Amount In Each Amount In Each Amount In Each Of Allowance Category Of Allowance Category Of Allowance Category For To Total For To Total For To Total Loan Losses Loans Loan Losses Loans Loan Losses Loans ------------- -------- -------------- ----- -------------- ----- (Dollars in thousands) Commercial.................................. $ 3,402 19.2% $ 2,314 18.4% $ 3,227 17.9% Commercial real estate...................... 2,094 18.7 2,181 18.0 1,734 16.3 Agricultural................................ 2,464 18.6 1,591 19.8 1,288 18.9 Residential real estate..................... 1,259 22.7 952 24.8 1,489 27.8 Consumer and home equity.................... 2,449 20.8 1,792 19.0 1,643 19.1 Unallocated ................................ 2,215 -- 2,591 -- 189 -- ------ ----- ------- ------ -------- ------ Total............................. $13,883 100.0% $11,421 100.0% $ 9,570 100.0% ====== ===== ======= ====== ======== ====== At December 31, -------------------------------------------------------- 1997 1996 ----------------------- ---------------------- (Dollars in thousands) Percent Percent Of Loans Of Loans Amount In Each Amount In Each Of Allowance Category Of Allowance Category For To Total For To Total Loan Losses Loans Loan Losses Loans ------------- ----- ------------- ----- Commercial...................................... $ 2,406 17.6% $ 1,573 18.2% Commercial real estate.......................... 1,237 16.5 1,081 17.8 Agricultural.................................... 1,377 17.8 928 15.7 Residential real estate......................... 1,328 28.3 965 28.5 Consumer and home equity........................ 1,490 19.8 1,555 19.8 Unallocated .................................... 307 -- 1,027 -- -------- ------- ------- ------- Total.................................. $ 8,145 100.0% $ 7,129 100.0% ======== ======= ======= =======
Loan Maturity and Repricing Schedule The following table sets forth certain information as of December 31, 2000, 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.
ONE WITHIN THROUGH AFTER ONE FIVE FIVE YEAR YEARS YEARS TOTAL At December 31, 2000 ------------ ----------- ------------ ------------ (IN THOUSANDS) Commercial....................... $ 79,230 $ 58,644 $ 31,958 $ 169,832 Commercial real estate........... 4,914 17,917 143,294 166,125 Agricultural..................... 40,990 39,754 84,623 165,367 Residential real estate.......... 4,980 14,443 182,046 201,469 Consumer and home equity......... 11,924 115,447 57,374 184,745 ------------ ----------- ------------ ------------ Total loans.................... $ 142,038 $ 246,205 $ 499,295 $ 887,538 ============ =========== ============ ============
Loans maturing after one year: With a predetermined interest rate $161,525 $152,512 With a floating or adjustable rate 84,680 346,783 20 INVESTING ACTIVITIES U.S. Treasury and Agency Securities. 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. At that date, the portfolio consisted of $15.8 million in U. S. Treasury securities and $155.4 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, 1999, the U. S. Treasury and Agency securities portfolio totaled $154.2 million of which $150.2 million was classified as available for sale. State and Municipal Obligations. 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. At December 31, 1999, the portfolio of state and municipal obligations totaled $93.6 million, of which $16.2 million was classified as available for sale. At that date, $77.4 million was classified as held to maturity, with a fair value of $77.0 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, 2000, the Company had $29.1 million in mortgage-backed securities, all classified as available for sale. At December 31, 1999, the Company had $21.0 million in mortgage-backed securities, all classified as available for sale. Corporate Bonds. The corporate bond portfolio at December 31, 2000 totaled $9.3 million, 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, 1999 totaled $8.7 million, all of which was classified as available for sale. Equity Securities. At December 31, 2000, equity securities totaled $5.3 million, all of which was classified as available for sale. The portfolio primarily includes $4.0 million of FHLB stock. At December 31, 1999, equity securities totaled $4.3 million, all of which was classified as available for sale, including $3.1 million of FHLB stock. 21 Security Yields, Maturities and Repricing Schedule. The following table sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company's securities portfolio as of December 31, 2000. Adjustable-rate securities are included in the period in which interest rates are next scheduled to adjust. No tax equivalent adjustments were made to the weighted average yields.
At December 31, 2000 ------------------------------------------------------------------------------------------------- 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 Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield ------ ------- -------- ------ ------ ----- ------- ----- ------- ----- (Dollars in thousands) Available for sale: U.S. Treasury and agency.... $ 10,047 5.91% $120,838 6.25% $ 39,242 6.67% $ -- --% $170,127 6.33% Mortgage-backed securities.. 408 6.55 14,998 6.33 9,467 6.95 4,146 6.57 29,019 6.57 State and municipal obligations................. 1,850 4.41 23,342 4.65 20,912 4.91 2,408 5.43 48,512 4.79 Corporate bonds............. -- -- 7,002 6.48 2,463 6.26 249 6.15 9,714 6.42 -------- -------- -------- -------- -------- Total debt securities......... 12,305 5.71 166,180 6.04 72,084 6.18 6,803 6.15 257,372 6.07 -------- -------- -------- -------- -------- Equity securities............. -- -- -- -- -- -- -- -- 4,741 7.67 -------- -------- -------- -------- -------- Total securities available for sale.............. $ 12,305 5.71% $166,180 6.04% $ 72,084 6.18% $ 6,803 6.15% $262,113 6.10% ======== ======== ======== ======== ======== Held to maturity: U.S. Treasury and agency.... $ -- --% $ 1,950 6.22% $ -- --% $ -- --% $ 1,950 6.22% State and municipal obligations................. 30,056 4.63 39,585 4.62 4,724 5.12 632 6.12 74,997 4.67 -------- -------- -------- -------- -------- Total securities held to maturity.............. $ 30,056 4.63% $ 41,535 4.70% $ 4,724 5.12% $ 632 6.12% $ 76,947 4.71% ======== ======== ======== ======== ========
22 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 ---------------------------------------------- 2000 1999 1998 --------- --------- --------- (Dollars in thousands) Federal funds purchased $ 895 $ - $ - Securities sold under repurchase agreements 15,055 4,596 5,362 FHLB advances............................... 30,953 41,500 - ----------- ----------- ----------- Total short-term borrowings............. $ 46,903 $ 46,096 $ 5,362 ========== ========== ========== Average rate at year-end. ................. 5.75% 5.77% 4.33% Average rate during period.................. 5.96% 5.02% 5.02%
The Company had $32.7 million and $11.0 million of remaining credit available under lines of credit with the FHLB at December 31, 2000 and 1999 which are collateralized by FHLB stock and real estate mortgage loans. Long-term borrowings are summarized as follows:
At December 31 ---------------------------------------------- 2000 1999 1998 --------- --------- --------- (Dollars in thousands) FHLB advances............................... $ 15,382 $ 8,421 $ 6,617 10% notes................................... - 1,698 1,739 Other....................................... 99 121 144 ----------- ----------- ----------- Total long-term borrowings............. $ 15,481 $ 10,240 $ 8,500 ========== ========== ==========
Advances payable to FHLB are collateralized by FHLB stock and real estate mortgage loans. The advances mature from 2001 through 2009 and bear interest at a fixed weighted average rate of 6.43% as of December 31, 2000. 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 $778.9 million or 72.3% of total deposits of $1,078.1 million at December 31, 2000. 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 $299.2 million as of December 31, 2000, largely from in-market municipal, business and individual customers. However, during 2000, the Banks began to utilize brokered certificates of deposit as an alternative funding source in response to the continued loan growth. As of December 31, 2000, brokered certificates of deposit included in certificates of deposit over $100,000 totaled $15.0 million. Total deposits at December 31, 1999 amounted to $949.5 million, an increase of $99.0 million or 11.6% from $850.5 million at December 31, 1998. Core deposit products were $726.6 million or 76.5% of total deposits at December 31, 1999. Certificates of deposit over $100,000 totaled $222.9 million at December 31, 1999. 23 The daily average balances, percentage composition and weighted average rates paid on deposits for each of the years ended December 31, 2000, 1999 and 1998 are presented below:
For the year ended December 31 2000 1999 1998 ----------------------------- ------------------------------ --------------------------- Percent Percent Percent Of Total Weighted Of Total Weighted Of Total Weighted Average Average Average Average Average Average Average Average Average Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate ------- -------- ------ ------- -------- ----- ------- -------- ------- (Dollars in thousands) Interest-bearing checking........ $ 113,344 11.4% 1.36% $ 105,076 11.8% 1.34% $ 91,627 11.5% 1.46% Savings and money market......... 193,027 19.3 2.66 183,800 20.7 2.43 163,966 20.5 2.62 Certificates of deposit under $100,000................. 294,926 29.5 5.63 280,953 31.6 5.22 274,750 34.4 5.68 Certificates of deposit over $100,000................. 260,757 26.1 6.32 190,942 21.5 5.18 158,317 19.8 5.64 Non-interest-bearing accounts.... 136,614 13.7 -- 127,899 14.4 -- 110,294 13.8 -- --------- ------ --------- ----- --------- ----- Total average deposits......... $ 998,668 100.0% 3.98% $ 888,670 100.0% 3.78% $ 798,954 100.0% 3.78% ========= ====== ========= ===== ========= =====
The following table indicates the amount of the Company's certificates of deposit by time remaining until maturity as of December 31, 2000:
At December 31, 2000 -------------------------------------------------------------- 3 Months Over 3 To 6 Over 6 To 12 Over 12 Or Less Months Months Months Total ---------- --------- ---------- ---------- ---------- (Dollars in thousands) Certificates of deposit less than $100,000.. $ 78,249 $ 51,823 $ 100,605 $ 75,688 $ 306,365 Certificates of deposit of $100,000 or more. 185,799 46,269 48,190 18,916 299,174 ---------- --------- ---------- ---------- ---------- Total certificates of deposit............ $ 264,048 $ 98,092 $ 148,795 $ 94,604 $ 605,539 ========== ========= ========== ========== ==========
NET INCOME ANALYSIS Net Interest Income Net interest income, the principal source of the Company's earnings, was $53.2 million in 2000 compared with $47.0 million in 1999, an increase of 13.1%. The increase is the result of a 16.1% increase in average earning assets. The growth in earning assets was partially offset by a 12 basis point decline in the net interest margin. Net interest income was $47.0 million in 1999 compared with $41.9 million in 1998, an increase of 12.2%. Average earning assets grew by $118.7 million in 1999, or 13.7% over 1998, which offset the effects of a 6 basis point decline in the net interest margin. Net interest margin, on a tax-equivalent basis, was 4.88% for 2000, 5.00% for 1999 and 5.06% for 1998. The continuing decline in net interest margin in 2000 is the result of rates on interest-bearing liabilities growing faster than rates on interest-bearing assets and a shift in the mix of funding sources. This shift in funding is in response to the loan growth continuing to outpace core deposit growth. Accordingly, brokered deposits and FHLB term advances have been used. The cost of interest-bearing liabilities increased to 4.72% in 2000 from 4.05% in 1999 after declining from 4.41% in 1998. In 1999, the 36 basis point decline was partially attributed to closely managing interest rate pricing on deposits. The yield on interest-earning assets increased to 8.70% in 2000 from 8.24% in 1999. The interest-earning asset yield was 8.65% in 1998. The increase in interest-earning asset yield in 2000 was the direct result of higher market interest rates and a better mix of earning assets from the growth of the loan portfolio, which more than offset the continued competitive pressures for additional loan assets that caused the decline in interest-earning asset yield in 1999. 24 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 have been included in the yield calculations in this table.
Year ended December 31 ------------------------------------------------------------------------ 2000 1999 ------------------------------------ --------------------------------- Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate ------- ---- ---- ------- ---- ---- (Dollars in thousands) Interest-earning assets: Federal funds sold and interest- bearing deposits.......................... $ 3,039 $ 184 6.05% $ 8,529 $ 428 5.02% Investment securities (1) ................ 312,389 20,638 6.61 274,290 17,203 6.27 Loans (2) ................................. 825,953 78,538 9.51 700,062 63,417 9.06 ----------- ----------- --------- --------- Total interest-earning assets ........... 1,141,381 99,360 8.70 982,881 81,048 8.24 ----------- ----------- --------- --------- Allowance for loan losses ................ (12,509) (10,261) Other non-interest-earning assets 68,644 63,841 ----------- ---------- Total assets ............................ $ 1,197,516 $1,036,461 =========== ========== Interest-bearing liabilities: Savings and money market................... $ 193,027 $ 5,135 2.66% $ 183,800 $ 4,461 2.43% Interest-bearing checking ................. 113,344 1,537 1.36 105,076 1,408 1.34 Certificates of deposit ................... 555,683 33,086 5.95 471,895 24,551 5.20 Borrowed funds ............................ 60,978 3,847 6.31 26,398 1,463 5.54 ----------- ----------- --------- --------- Total interest-bearing liabilities ...... 923,032 43,605 4.72 787,169 31,883 4.05 ----------- ----------- --------- --------- Non-interest-bearing demand deposits ....... 136,614 127,899 Other non-interest-bearing liabilities ..... 14,906 14,091 ----------- --------- Total liabilities ....................... 1,074,552 929,159 Stockholders' equity (3) ................... 122,964 107,302 ----------- --------- Total liabilities and stockholders' equity ............................. $ 1,197,516 $1,036,461 =========== ========== Net interest income ........................ $ 55,755 $ 49,165 =========== =========== Net interest rate spread ................... 3.98% 4.19% ==== ==== Net earning assets ......................... $ 218,349 $ 195,712 =========== =========== Net interest income as a percentage of average interest-earning assets ........... 4.88% 5.00% ==== ==== Ratio of average interest-earning assets to average interest-bearing liabilities ... 123.66% 124.86% ====== ====== Year ended December 31 ----------------------------------------- 1998 ----------------------------------------- Average Interest Outstanding Earned/ Yield/ Balance Paid Rate ------- ---- ---- (Dollars in thousands) Interest-earning assets: Federal funds sold and interest- bearing deposits.......................... $ 15,406 $ 842 5.47% Investment securities (1) ................. 227,352 14,784 6.50 Loans (2) .................................. 621,418 59,090 9.51 ----------- ----------- Total interest-earning assets ............ 864,176 74,716 8.65 ----------- ----------- Allowance for loan losses ................. (8,910) Other noninterest-earning assets 63,142 ----------- Total assets ............................. $ 918,408 =========== Interest-bearing liabilities: Savings and money market................... $ 163,966 $ 4,301 2.62% Interest-bearing checking .................. 91,627 1,335 1.46 Certificates of deposit .................... 433,067 24,523 5.66 Borrowed funds ............................. 13,635 799 5.86 ------------- --------- Total interest-bearing liabilities ....... 702,295 30,958 4.41 ------------- ---------- Non-interest-bearing demand deposits ........ 110,294 Other non-interest-bearing liabilities ...... 13,613 ------------ Total liabilities ........................ 826,202 Stockholders' equity (3) .................... 92,206 ------------ Total liabilities and stockholders' equity .............................. $ 918,408 =========== Net interest income ......................... $ 43,758 =========== Net interest rate spread .................... 4.24% ==== Net earning assets .......................... $ 161,881 ============= Net interest income as a percentage of average interest-earning assets ............ 5.06% ==== Ratio of average interest-earning assets to average interest-bearing liabilities .... 123.05% ======
(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. 25 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 --------------------------------------------------------------------------------- 2000 VS. 1999 1999 VS. 1998 ------------------------------------ -------------------------------- Increase/(Decrease) Total Increase/(Decrease) Total Due To Increase Due To Increase Volume Rate (Decrease) Volume Rate (Decrease) ------ ---- ---------- ------- ---- ---------- (Dollars in thousands) Interest-earning assets: Federal funds sold and interest bearing deposits.......................... $ (331) $ 87 $ (244) $ (346) $ (69) $ (415) Investment securities...................... 2,552 883 3,435 2,847 (442) 2,405 Loans...................................... 12,060 3,061 15,121 7,135 (2,809) 4,326 -------- -------- -------- ------- ------ ------- Total interest-earning assets......... 14,281 4,031 18,312 9,636 (3,320) 6,316 ======== ======== ======== ======= ====== ======= Interest-bearing liabilities: Savings and money market................... 239 435 674 180 (107) 73 Interest-bearing checking.................. 108 21 129 482 (321) 161 Certificates of deposit .................. 4,959 3,576 8,535 2,020 (1,993) 27 Borrowed funds............................. 2,181 203 2,384 707 (43) 664 -------- -------- -------- ------- ------ ------- Total interest-bearing liabilities.... 7,487 4,235 11,722 3,389 (2,464) 925 ======== ======= ======== ======= ====== ======= Net interest income.......................... $ 6,794 $ (204) $ 6,590 $6,247 $ (856) $ 5,391 ======== ======= ======== ======= ====== ======
Provision for Loan Losses The provision for loan losses was $4.2 million in 2000, compared to $3.1 million in 1999 and $2.7 million in 1998. The amount of the provision was in excess of the net charge-offs for each of the three years. The increase in the allowance for loan losses primarily reflects the significant growth in commercial, commercial real estate, and consumer loans. Noninterest Income The following table presents the major categories of noninterest income during the years indicated:
Year Ended December 31 ----------------------------------------- 2000 1999 1998 ------ ------ ------ (Dollars in thousands) Service charges on deposit accounts.................... $5,003 $4,289 $3,234 Loan servicing fees.................................... 1,154 1,192 1,190 Mutual fund commissions................................ 960 882 672 Insurance fees......................................... 358 327 238 Gain on sale of assets................................. 497 292 181 Other.................................................. 1,123 866 866 ------ ------ ------ Total noninterest income............................. $9,095 $7,848 $6,381 ====== ====== ======
Service charges on deposit accounts increased in 2000 reflecting the benefit of the growth in core deposits. The increase in mutual fund commissions reflects the commencement of operations of FIGI, the Company's brokerage subsidiary, in March of 2000, which has enabled FII to retain a higher portion of commissions on mutual fund sales. An increase in gain on the sale of assets from $292,000 in 1999 to $497,000 in 2000 was derived mainly from $382,000 in gains on the sale of loans in 2000 versus $152,000 in 1999. Service charges on deposit accounts increased $1.1 million, or 32.6%, in 1999 from $3.2 million in 1998 as a result of an increase in demand deposit customers and selected increases in deposit service pricing. Mutual fund commissions increased $210,000, or 31.3% in 1999, due to greater emphasis on the sale of such investment products. An increase of $111,000 in gain on the sale of assets from $181,000 in 1998 to $292,000 in 1999 was derived from $71,000 in gain on the sale of securities available for sale versus no security gains in 1998 and $40,000 of additional gain on the sale of loans and other assets. 26 Noninterest Expenses The following table presents the major categories of noninterest expense during the years indicated:
Year Ended December 31 ------------------------------------------ 2000 1999 1998 ------- ------- ------- (Dollars in thousands) Salaries and employee benefits........................ $16,803 $14,801 $13,092 Occupancy and equipment............................... 4,614 4,491 3,855 Supplies and postage.................................. 1,500 1,295 1,363 Amortization of intangibles........................... 737 839 839 Professional fees..................................... 826 618 809 Advertising........................................... 637 574 487 Other real estate..................................... 126 259 378 Other expense......................................... 4,913 4,155 3,779 ------- ------- ------- Total noninterest expense........................... $30,156 $27,032 $24,602 ======= ======= =======
The 11.6% increase in noninterest expense in 2000 is largely the result of staffing additions related to expanding lending activities, technological expenditures associated with expanding the Company's product line and distribution channels and the opening of new branch offices. Noninterest expenses increased 9.9% in 1999 primarily from an investment in staff additions and upgrades to facilities and technology. The Company also added features to technological capabilities including an internet banking product, check imaging and upgrades to overall data processing capabilities in preparation for the year 2000. 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, 2000, 1999 and 1998 the efficiency ratio was 46.3%, 47.0% and 48.3%, respectively. The Company's largest component of noninterest expense, salaries and employee benefits, increased 13.5% in 2000 and 13.1% in 1999. Upgrades to salary and incentive compensation programs, additions to the management team and additional staff hired at the new branch offices account for the increases. Occupancy and equipment costs increased 2.7% in 2000 and 16.5% in 1999 due to new branch openings and additional technological expenditures. LIQUIDITY AND CAPITAL RESOURCES The Company's most liquid assets are cash and due from banks, interest-bearing deposits and federal funds sold. The levels of these assets are dependent on operating, financing, lending and investing activities during any given period. At December 31, 2000, cash and due from banks, interest-bearing deposits and federal funds sold totaled $30.2 million, or 2.3% of total assets, as compared to $61.2 million, or 5.4% of total assets, at December 31, 1999. Cash and due from banks accounted for $20.4 million of the decrease as the Company's Year 2000 liquidity and cash flow contingency plan included additional contingency reserves at the end of 1999. The Company's primary sources of funds are deposits, proceeds from the principal and interest payments on loans, borrowings, and proceeds from the sale of fixed-rate mortgage loans to the secondary market. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, mortgage prepayments, mortgage loan sales and borrowings are greatly influenced by general interest rates, economic conditions and competition. The Company monitors its liquidity position on a daily basis. Excess short-term liquidity is usually invested in overnight federal funds sold. Additional sources of funds are available through the use of reverse repurchase agreements and advances from the Federal Home Loan Bank of New York (FHLB). Total deposits increased $128.6 million from December 31, 1999 to December 31, 2000. Deposit flows are affected by the level of interest rates, the interest rates and products offered by local competitors, as well as other factors. At December 31, 2000, the Company had total borrowings of $62.4 million, which primarily consisted of advances from the FHLB and repurchase agreements entered into with business customers. FHLB advances are available pursuant to several credit programs, each of which has its own interest rate and range of maturities. At December 31, 2000, the Company had $46.3 million of FHLB advances outstanding, a decrease of $3.6 million from $49.9 million at December 31, 1999. Outstanding loan commitments totaled $182.5 million at December 31, 2000. The Company anticipates it will have sufficient funds available to meet current loan commitments. 27 Certificates of deposit which are scheduled to mature in one year or less from December 31, 2000 total $510.9 million. Based upon experience and current pricing strategy, management believes that a significant portion of such deposits will remain with the Banks. At December 31, 2000, the Company significantly exceeded all minimum regulatory capital requirements with: o a consolidated leverage capital level of $129.8 million, or 10.19% of risk-weighted assets, which is above the required level of $50.9 million, or 4.00% of risk-weighted assets; o a Tier 1 risk-based capital of $129.8 million, or 14.02% of risk-weighted assets, which is above the required level of $37.1 million, or 4.00% of risk-weighted assets; and o a consolidated risk-based capital of $141.1 million, or 15.27% of risk-weighted assets, which is above the required level of $74.1 million, or 8.00% of risk-weighted assets. 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 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 to reduce the vulnerability of operations to changes in interest rates. The Company's asset/liability committee, which is comprised of 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, all under the direction of the Board. The asset/liability committee 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 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 reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning-assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing 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, 2000, the one-year gap position, the difference between the amount of interest-earning assets maturing or repricing within one year and interest-bearing liabilities maturing or repricing within one year, was $41.1 million, or 3.2% of total assets. Accordingly, over the one year period following December 31, 2000, the Company will have $41.1 million more in assets re-pricing than liabilities. Generally if rate-sensitive assets reprice 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 reprice 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 positive gap position at December 31, 2000 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, 2000 which management anticipates, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of the repricing date or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2000, 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 reprice 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 repricing rates can have a significant impact on the estimated gap. While management believes such assumptions are reasonable, there can be no assurance that assumed repricing rates will approximate actual future deposit activity. 28
Gap Table Volumes Subject to Repricing Within ------------------------------------------------------------------------------------------------- 0-30 31-180 181-365 1-3 3-5 >5 Non- December 31, 2000 days days days years years years Sensitive Total ---------- --------- --------- --------- -------- ---------- ---------- ---------- (Dollars in thousands) Interest-earning assets: Federal funds sold and and interest-bearing deposits ................... 926 $ -- $ 75 $ 100 $ -- $ -- $ -- $ 1,101 Investment securities (1) ............. 39,559 29,156 32,441 109,601 75,701 52,358 -- 338,816 Loans (2) .................... 371,368 67,987 92,249 138,791 104,025 113,146 (421) 887,145 ---------- --------- --------- --------- -------- ---------- ---------- ---------- Total interest-earning assets .................. 411,853 97,143 124,765 248,492 179,726 165,504 (421) 1,227,062 ---------- --------- --------- --------- -------- ---------- ---------- ---------- Interest-bearing liabilities: Interest-bearing checking, savings and money market deposits ........... 3,097 9,292 12,389 46,460 43,363 195,131 -- 309,732 Certificates of deposit ...... 129,694 227,064 150,104 86,449 10,823 1,405 -- 605,539 Borrowed funds ............... 23,518 20,463 3,081 9,344 1,360 4,618 -- 62,384 ---------- --------- --------- --------- -------- ---------- ---------- ---------- Total interest-bearing liabilities ............. 156,309 256,819 165,574 142,253 55,546 201,154 -- 977,655 ---------- --------- --------- --------- -------- ---------- ---------- ---------- Period gap ..................... $ 255,544 $(159,676) $ (40,809) $ 106,239 $124,180 $ (35,650) $ (421) $ 249,407 ========== ========= ========= ========= ======== ========== ========== ========== Cumulative gap ................. $ 255,544 $ 95,868 $ 55,059 $ 161,298 $285,478 $ 249,828 $ 249,407 ~ ========== ========= ========= ========= ======== ========== ========== ========== Period gap to total assets ..... 19.82% (12.38%) (3.17%) 8.24% 9.63% (2.77%) (0.03%) 19.34% ========== ========= ========= ========= ======== ========== ========== ========== Cumulative gap to total assets ................ 19.82% 7.44% 4.27% 12.51% 22.14% 19.38% 19.34% ========== ========= ========= ========= ======== ========== ========== Cumulative interest-earning assets to cumulative interest- bearing liabilities .......... 263.49% 123.21% 109.51% 122.37% 136.76% 125.55% 125.51% ========== ========= ========= ========= ======== ========== ==========
- ---------- (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. 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. 29 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, 2000:
Change in Interest Net Interest Income Economic Value of Equity Rates in Basis Points ------------------- ------------------------ (Rate Shock) $Amount $ Change % Change $ Amount $ Change % Change ------------ ------- -------- -------- -------- -------- -------- (dollars in thousands) 200........................ $60,587 $2,568 4.43% $227,894 $(8,485) (3.59%) 100........................ 59,515 1,496 2.58% 232,446 (3,933) (1.66%) Static..................... 58,019 -- -- 236,379 -- -- (100)...................... 56,068 (1,951) (3.36%) 238,159 1,780 0.75% (200)...................... 54,362 (3,657) (6.30%) 242,042 5,663 2.40%
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, 2000, a 200 basis point increase in rates would increase net interest income by $2.6 million, or 4.43%, over the next twelve month period. Conversely, a 200 basis point decrease in rates would decrease net interest income by $3.7 million, or 6.30%, 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. 30 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, 2000 and 1999 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, 2000. 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 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, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Buffalo, New York January 31, 2001 31 Financial Institutions, Inc. and Subsidiaries Consolidated Statements of Financial Condition December 31, 2000 and 1999
2000 1999 ----------- ----------- (Dollars in thousands, except per share amounts) Assets Cash, due from banks and interest-bearing deposits $ 29,226 $ 49,672 Federal funds sold 926 11,554 Securities available for sale, at fair value 261,869 200,272 Securities held to maturity (fair value of $76,884 and $80,902 at December 31, 2000 and 1999, respectively) 76,947 81,356 Loans, net 873,262 752,324 Premises and equipment, net 18,423 17,009 Other assets 28,674 24,273 ----------- ----------- Total assets $ 1,289,327 $ 1,136,460 =========== =========== Liabilities And Shareholders' Equity Deposits: Demand $ 162,840 $ 141,800 Savings, money market and interest-bearing checking 309,732 306,813 Certificates of deposit 605,539 500,918 ----------- ----------- Total deposits 1,078,111 949,531 Accrued expenses and other liabilities 17,214 13,054 Short-term borrowings 46,903 46,096 Long-term borrowings 15,481 10,240 ----------- ----------- Total liabilities 1,157,709 1,018,921 ----------- ----------- Shareholders' equity: 3% cumulative preferred stock, $100 par value, authorized 10,000 shares, issued and outstanding 1,711 shares in 2000 and 1,759 shares in 1999 171 176 8.48% cumulative preferred stock, $100 par value, authorized 200,000 shares, issued and outstanding 175,866 shares in 2000 and 176,356 shares in 1999 17,587 17,636 Common stock, $ 0.01 par value, authorized 50,000,000 shares, issued 11,303,533 shares in 2000 and 1999 113 113 Additional paid-in capital 16,472 16,448 Retained earnings 98,348 86,361 Accumulated other comprehensive loss (144) (2,661) Treasury stock, at cost - 316,812 shares in 2000 and 285,800 in 1999 (929) (534) ----------- ----------- Total shareholders' equity 131,618 117,539 ----------- ----------- Total liabilities and shareholders' equity $ 1,289,327 $ 1,136,460 =========== ===========
See accompanying notes to consolidated financial statements. 32 Financial Institutions, Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2000, 1999 and 1998 2000 1999 1998 ------- ------- ------- (Dollars in thousands, except per share amounts) Interest income: Loans $78,538 $63,417 $59,090 Securities 18,059 15,054 12,938 Other 184 428 842 ------- ------- ------- Total interest income 96,781 78,899 72,870 ------- ------- ------- Interest expense: Deposits 39,758 30,420 30,159 Borrowings 3,847 1,463 799 ------- ------- ------- Total interest expense 43,605 31,883 30,958 ------- ------- ------- Net interest income 53,176 47,016 41,912 Provision for loan losses 4,211 3,062 2,732 ------- ------- ------- Net interest income after provision for loan losses 48,965 43,954 39,180 ------- ------- ------- Noninterest income: Service charges on deposits 5,003 4,289 3,234 Loan servicing fees 1,154 1,192 1,190 Other 2,938 2,367 1,957 ------- ------- ------- Total noninterest income 9,095 7,848 6,381 ------- ------- ------- Noninterest expense: Salaries and employee benefits 16,803 14,801 13,092 Occupancy and equipment 4,614 4,491 3,855 Supplies and postage 1,500 1,295 1,363 Amortization of intangibles 737 839 839 Other 6,502 5,606 5,453 ------- ------- ------- Total noninterest expense 30,156 27,032 24,602 ------- ------- ------- Income before income taxes 27,904 24,770 20,959 Income taxes 9,804 8,813 7,354 ------- ------- ------- Net income $18,100 $15,957 $13,605 ======= ======= ======= Earnings per common share: Basic $ 1.51 $ 1.38 $ 1.22 Diluted $ 1.51 $ 1.38 $ 1.22 See accompanying notes to consolidated financial statements. 33 Financial Institutions, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income Years Ended December 31, 2000, 1999 and 1998
Accumulated Other Additional Compre- Total 3% 8.48% Paid hensive Share- Preferred Preferred Common In Retained Income Treasury holders' Stock Stock Stock Capital Earnings (Loss) Stock Equity ----- ----- ----- ------- -------- ------ ----- ------ (Dollars in thousands, except per share amounts) Balance - December 31, 1997 $185 $17,743 $102 $2,787 $65,661 $749 ($384) $86,843 Purchase of 5 shares of 3% preferred stock (1) -- -- -- -- -- -- (1) Purchase of 693 shares of 8.48% preferred stock -- (70) -- (7) -- -- -- (77) Purchase of 23,500 shares of common stock -- -- -- -- -- -- (162) (162) Sale of 10,600 shares of treasury stock -- -- -- 57 -- -- 20 77 Comprehensive income: Net income -- -- -- -- 13,605 -- -- 13,605 Unrealized gain on securities available for sale (net of tax of $273) -- -- -- -- -- 392 -- 392 ------- Total comprehensive income -- -- -- -- -- -- -- 13,997 ------- Cash dividends declared: 3% Preferred - $3.00 per share -- -- -- -- (6) -- -- (6) 8.48% Preferred - $8.48 per share -- -- -- -- (1,500) -- -- (1,500) Common - $0.26 per share -- -- -- -- (2,593) -- -- (2,593) ---- ------- ---- ------ ------- ------ ----- ------- 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 stock -- (37) -- (5) -- -- -- (42) 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 ($2,665)) -- -- -- -- -- (3,845) -- (3,845) 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 -- -- 11 13,612 -- -- -- 13,623 through initial public offering, net of costs ---- ------- ---- ------ ------- ------ ----- ------- 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 $1,735) -- -- -- -- -- 2,501 -- 2,501 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 ==== ======= ==== ====== ======= ====== ===== =======
See accompanying notes to consolidated financial statements. 34 Financial Institutions, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 --------- --------- --------- (Dollars in thousands) Cash flows from operating activities: Net income $ 18,100 $ 15,957 $ 13,605 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,032 3,585 3,117 Provision for loan losses 4,211 3,062 2,732 Deferred income tax benefit (965) (692) (670) Gain on sale of assets (497) (292) (181) Increase in other assets (5,919) (422) (1,210) Increase (decrease) in accrued expenses and other liabilities 3,825 (1,993) 1,299 --------- --------- --------- Net cash provided by operating activities 21,787 19,205 18,692 --------- --------- --------- Cash flows from investing activities: Purchase of securities: Available for sale (100,150) (110,571) (141,300) Held to maturity (21,124) (20,247) (46,008) Proceeds from maturities of securities: Available for sale 28,688 55,990 94,841 Held to maturity 25,248 29,563 53,766 Proceeds from sales of securities available for sale 14,022 4,585 -- Increase in loans, net (124,767) (109,377) (54,025) Purchase of premises and equipment, net (3,193) (896) (3,673) --------- --------- --------- Net cash used in investing activities (181,276) (150,953) (96,399) --------- --------- --------- Cash flows from financing activities: Increase in deposits, net 128,580 99,076 82,729 Increase (decrease) in short-term borrowings, net 807 40,734 (3,487) Proceeds from long-term borrowings 7,089 1,906 5,344 Repayment of long-term borrowings (1,848) (166) (61) Proceeds from initial public offering, net of costs -- 13,623 -- Repurchase of preferred and common shares, net (425) (54) (163) Dividends paid (5,788) (4,988) (3,987) --------- --------- --------- Net cash provided by financing activities 128,415 150,131 80,375 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (31,074) 18,383 2,668 Cash and cash equivalents at the beginning of the year 61,226 42,843 40,175 --------- --------- --------- Cash and cash equivalents at the end of the year $ 30,152 $ 61,226 $ 42,843 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during year for: Interest $ 40,436 $ 32,051 $ 29,920 Income taxes $ 10,821 $ 9,012 $ 8,431 ========= ========= =========
See accompanying notes to consolidated financial statements. 35 Financial Institutions, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Financial Institutions, Inc. ("FII") and subsidiaries (the "Company") provide deposit, lending and other financial services to individuals and businesses in Central and Western New York State. The accounting policies of the Company conform to generally accepted accounting principles and prevailing practices in the banking industry. FII and the subsidiary banks are each subject to regulation by certain federal and state banking agencies. Principles of Consolidation The consolidated financial statements include the accounts of FII, its four 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"), and First Tier Bank & Trust (100% owned) ("FTB"). Also included are the accounts of The FI Group, Inc. (100% owned) ("FIGI"), a full service brokerage business. All significant intercompany transactions and balances have been eliminated in consolidation. 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 until realized. 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. Loans Loans are stated at the principal amount outstanding, net of discounts and deferred loan origination fees and costs which are accrued to 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 outstanding commitments from investors or, in the absence of such commitments, the current investor yield requirements. 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. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The Company services residential mortgage loans for other institutions. Servicing fees are recognized when payments are received. The cost of originating these loans is attributed to the loans and is considered in the calculation of the gain or loss on sale of the loans. The Company capitalizes servicing assets when servicing rights are retained after selling loans to other institutions. Capitalized servicing rights 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 of the underlying loans. 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. 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. 36 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. 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. Intangible Assets Deposit base premiums and goodwill are being amortized on the straight-line method, over the expected periods to be benefited, which generally range between 10 and 20 years. Intangible assets are periodically reviewed for impairment or when events or changed circumstances may affect the underlying basis of the assets. 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. 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 ------------------------------ 2000 1999 1998 -------- ------ ------ (Dollars and Shares in thousands) Net income $18,100 $15,957 $13,605 Less: Preferred stock dividends 1,496 1,503 1,506 ------- ------- ------- Net income available to common shareholders $16,604 $14,454 $12,099 ======= ======= ======= Average number of common shares outstanding 10,995 10,474 9,916 Add: Effect of dilutive options 1 -- -- ------- ------- ------- Average number of common shares outstanding used to calculate diluted earnings per common share 10,996 10,474 9,916 ======= ======= ======= 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. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. 37 Cash Equivalents For purposes of the consolidated statements of cash flows, interest-bearing deposits and federal funds sold are considered cash equivalents. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, and revenues and expenses for the period. Actual results could differ from those estimates. (2) Pending Acquisition On November 2, 2000, FII reached a definitive agreement to acquire all of the outstanding stock of Bath National Corporation (BNC) and its wholly-owned subsidiary bank, Bath National Bank (BNB). BNB is a full-service community bank headquartered in Bath, New York, which has 11 branch locations in Steuben, Yates, Ontario and Schuyler Counties. Consolidated assets of BNC were approximately $288 million as of December 31, 2000. FII has agreed to pay $48.00 per share in cash for each of the outstanding shares of BNC common stock with an aggregate purchase price of approximately $62.6 million. The acquisition, which has been approved by the BNC shareholders, but is subject to review 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 2001. The Company plans to fund the acquisition utilizing existing cash and cash equivalents, cash from additional dividends declared by bank subsidiaries and a $16.2 million offering of trust preferred securities and third-party bank borrowings. 38 (3) Securities The aggregate amortized cost and fair value of securities available for sale and securities held to maturity follow: December 31, 2000 (Dollars in thousands) Gross Unrealized Amortized -------------------- Fair 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 4,741 520 - 5,261 -------- -------- -------- -------- Total securities available for sale $262,113 $ 1,838 $ 2,082 $261,869 ======== ======== ======== ======== 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 ======== ======== ======== ======== December 31, 1999 (Dollars in thousands) Gross Unrealized Amortized -------------------- Fair Cost Gains Losses Value --------- -------- -------- -------- Securities Available for Sale: U.S. Treasury and agency $154,353 $ 14 $ 4,158 $150,209 Mortgage-backed securities 21,372 9 406 20,975 State and municipal obligations 16,331 18 208 16,141 Corporate bonds 9,022 7 363 8,666 Equity securities 3,713 568 - 4,281 -------- -------- -------- -------- Total securities available for sale $204,791 $ 616 $ 5,135 $200,272 ======== ======== ======== ======== Securities Held to Maturity: U.S. Treasury and agency $ 3,946 $ -- $ 29 $ 3,917 State and municipal obligations 77,410 296 721 76,985 -------- -------- -------- -------- Total securities held to maturity $ 81,356 $ 296 $ 750 $80,902 ======== ======== ======== ======== The amortized cost and fair value of debt securities by contractual maturity at December 31, 2000 are as follows: Available for Sale Held to Maturity ------------------ ---------------- Amortized Fair Amortized Fair (Dollars in thousands) Cost Value Cost Value -------- -------- -------- -------- Due in one year or less $ 12,305 $ 12,295 $ 30,056 $ 30,053 Due in one to five years 166,180 165,373 41,535 41,476 Due in five to ten years 72,084 72,057 4,724 4,722 Due after ten years 6,803 6,883 632 633 -------- -------- -------- -------- $257,372 $256,608 $ 76,947 $ 76,884 ======== ======== ======== ======== 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. Proceeds from the sale 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 of securities available for sale during 1999 were $4,585,000; realized gross gains were $126,000 and gross losses were $55,000. The Company did not sell any securities in 1998. Gains and losses were computed using the specific identification method. There were no transfers between held to maturity and available for sale securities in 2000, 1999 or 1998. Securities held to maturity and available for sale with carrying values of $285,559,000 and $240,628,000 were pledged as collateral for municipal deposits at December 31, 2000 and 1999, respectively. 39 (4) Loans Loans outstanding at December 31, 2000 and 1999 are summarized as follows: 2000 1999 ------------ --------- (Dollars in thousands) Commercial............... $169,832 $140,376 Commercial real estate... 166,125 137,694 Agricultural............. 165,367 151,534 Residential real estate.. 201,469 189,466 Consumer and home equity. 184,745 145,038 -------- -------- Loans, gross 887,538 764,108 Net deferred fees........ (393) (363) Allowance for loan losses (13,883) (11,421) -------- -------- Loans, net.............. $873,262 $752,324 ======== ======== The following table sets forth the changes in the allowance for loan losses for the years indicated. Years ended December 31 ------------------------------ 2000 1999 1998 -------- ------ ------ (Dollars in thousands) Balance at beginning of year........ $11,421 $ 9,570 $ 8,145 Charge-offs: Commercial....................... 466 312 263 Commercial real estate........... 629 139 687 Agricultural..................... 85 12 19 Residential real estate.......... 113 461 215 Consumer and home equity......... 905 663 488 ------- ------- ------- Total charge-offs 2,198 1,587 1,672 ------- ------- ------- Recoveries: Commercial....................... 206 88 106 Commercial real estate........... 22 23 84 Agricultural..................... 1 - - Residential real estate.......... 5 163 42 Consumer and home equity......... 215 102 133 ------- ------- ------- Total recoveries 449 376 365 ------- ------- ------- Net charge-offs..................... 1,749 1,211 1,307 Provision for loan losses......... 4,211 3,062 2,732 ------- ------- ------- Balance at end of year.............. $13,883 $11,421 $ 9,570 ======= ======= ======= The following table sets forth information regarding nonaccruing loans and other nonperforming assets at December 31, 2000 and 1999: 2000 1999 ------ ------ (Dollars in thousands) Nonaccruing loans .................................... $6,596 $4,775 Accruing loans 90 days or more delinquent ............ 521 969 ------ ------ Total nonperforming loans ............................ 7,117 5,744 Other real estate owned .............................. 932 969 ------ ------ Total nonperforming assets ........................... 8,049 6,713 Less: government guaranteed portion of nonperforming loans ........................... 1,601 734 ------ ------ Total nonperforming assets, net of government guaranteed portion .................... $6,448 $5,979 ====== ====== The recorded investment in loans that are considered to be impaired totaled $6,113,000 and $3,682,000 at December 31, 2000 and 1999, respectively. The allowance for loan losses related to impaired loans amounted to $1,140,000, at December 31, 2000 and $865,000 at December 31, 1999. The average recorded investment in impaired loans during 2000, 1999 and 1998 was $5,329,000, $3,838,000 and $8,111,000, respectively. Interest income recognized on impaired loans, while such loans were impaired, during 2000, 1999 and 1998 was approximately $312,000, $82,000 and $246,000, 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, 2000, letters of credit totaling $7,018,000 and unused loan commitments of $182,491,000 were contractually available. Comparable amounts for these commitments at December 31, 1999 were $4,601,000 and $152,416,000, 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, 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 $23,988,000 and $14,912,000 at December 31, 2000 and 1999, 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. 40 As of December 31, 2000, 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. Loans serviced for others amounting to $205,218,000, $200,217,000 and 177,797,000 at December 31, 2000, 1999 and 1998, respectively are not included in the consolidated statements of financial condition. Loans held for sale totaled $3,280,000 and $2,131,000 at December 31, 2000 and 1999, respectively. Proceeds from the sale of loans were $25,880,000, $53,552,000 and $55,725,000 in 2000, 1999 and 1998, respectively. Net gain on the sale of loans was $382,000, $152,000 and $232,000 in 2000, 1999 and 1998, respectively. Commitments to sell loans were $847,000 and $1,458,000 at December 31, 2000 and 1999, 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 agencies (FHLMC and FHA). (5) Premises and Equipment A summary of premises and equipment at December 31, 2000 and 1999 follows: (Dollars in thousands) 2000 1999 -------- -------- Land and land improvements $ 1,975 $ 1,980 Buildings and leasehold improvements 17,034 15,294 Furniture, fixtures, equipment and vehicles 13,488 11,982 -------- -------- 32,497 29,256 Accumulated depreciation and amortization (14,074) (12,247) -------- -------- Premises and equipment, net $ 18,423 $ 17,009 ======== ======== Depreciation expense amounted to $1,866,000, $2,036,000 and $1,745,000 for the years ended December 31, 2000, 1999 and 1998, respectively. (6) Deposits Scheduled maturities for certificates of deposit at December 31, 2000 are as follows: Mature in year ending December 31, (Dollars in thousands) 2001...................... $510,935 2002...................... 77,812 2003...................... 6,842 2004...................... 2,876 2005...................... 7,035 After 2005............... 39 -------- $605,539 ======== Certificates of deposit greater than $100,000 totaled $299,174,000 and $222,901,000 at December 31, 2000 and 1999 respectively. Interest expense on certificates of deposit greater than $100,000 amounted to $15,962,000, $9,895,000, and $8,928,000 for the years ended December 31, 2000, 1999 and 1998, respectively. (7) Borrowings Short-term borrowings at December 31, 2000 and 1999 are summarized as follows: (Dollars in thousands) 2000 1999 ------- ------- Federal funds purchased $ 895 $ -- Securities sold under repurchase agreements 15,055 4,596 FHLB advances 30,953 41,500 ------- ------- Total $46,903 $46,096 ======= ======= Average rate at year-end 5.75% 5.77% ======= ======= Average rate during period 5.96% 5.02% ======= ======= The FHLB advances mature in less than one year and carry rates of interest from 4.90% to 6.71%. Advances payable to the FHLB are collateralized by $4.0 million of FHLB stock and residential mortgage loans with a carrying value of $133.4 million at December 31, 2000. At December 31, 2000, the Company had remaining credit available of $32.7 million under lines of credit with the FHLB. Securities sold under repurchase agreements as of and for the years ended December 31, 2000, 1999 and 1998 are summarized as follows: (Dollars in thousands) 2000 1999 1998 ------- ------- ------- Weighted average interest rate at year-end 4.13% 4.73% 4.51% Maximum outstanding at any month-end $15,055 $11,537 $ 6,547 Average amount outstanding during the year $ 6,777 $ 7,835 $ 4,248 41 The average amounts outstanding are computed using daily average balances. Related interest expense for 2000, 1999 and 1998 was $324,000, $350,000 and $193,000, respectively. At December 31, 2000 and 1999, long-term borrowings primarily include FHLB advances with maturities of more than 1 year. The aggregate maturities of long-term borrowings at December 31, 2000 are as follows: Mature in year ending December 31, (Dollars in thousands) 2001 $ 159 2002 8,168 2003 1,176 2004 178 2005 1,182 Thereafter 4,618 -------- Total $ 15,481 ======== The weighted average interest rate on long-term borrowings at December 31, 2000 and 1999 was 6.41% and 6.44%, respectively. (8) Initial Public Offering In June 1999, the Company priced its initial public offering of 1,103,133 common shares at an offering price of $14.00 per share. The Company realized proceeds of $13.6 million net of underwriting and other offering costs of approximately $1.8 million. (9) Income Taxes Total income taxes for the years ended December 31, 2000, 1999 and 1998 were allocated as follows: (Dollars in thousands) 2000 1999 1998 ------- ------- ------- Income from operations $ 9,804 $ 8,813 $ 7,354 Shareholders' equity, for unrealized gain (loss) on securities available for sale 1,746 (2,637) 273 ------- ------- ------- $11,550 $ 6,176 $ 7,627 ======= ======= ======= Income tax expense (benefit) attributable to operations for the years ended December 31, 2000, 1999 and 1998 consists of: (Dollars in thousands) 2000 1999 1998 ---- ---- ---- Current: Federal $ 8,380 $ 7,449 $ 6,339 State 2,389 2,056 1,685 - -------------------------------------------------------------------------------- Total current 10,769 9,505 8,024 - -------------------------------------------------------------------------------- Deferred: Federal (785) (657) (524) State (180) (35) (146) - -------------------------------------------------------------------------------- Total deferred (965) (692) (670) - -------------------------------------------------------------------------------- Total income taxes $ 9,804 $ 8,813 $ 7,354 ================================================================================ A reconciliation of the actual and statutory tax rates applicable to income from operations for the years ended December 31, 2000, 1999 and 1998 differ as follows: 2000 1999 1998 ---- ---- ---- Statutory rate 35.0% 35.0% 35.0% Increase (decrease) resulting from: Tax exempt interest income (6.0) (5.6) (5.6) State taxes, net of federal income tax benefit 5.1 5.3 4.8 Other 1.0 0.9 0.9 - ------------------------------------------------------------------------------ Total 35.1% 35.6% 35.1% ============================================================================== The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented as follows: (Dollars in thousands) 2000 1999 Deferred tax assets: -- -- Allowance for loan losses $5,437 $4,456 Unrealized loss on securities available for sale 100 1,846 Core deposit intangible 603 511 Interest on nonaccrual loans 536 455 Deferred loan origination fees 157 145 Other 52 90 - -------------------------------------------------------------------------------- Total gross deferred tax assets 6,885 7,503 - -------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation of premises and equipment 447 535 Prepaid pension costs 1,504 1,406 Other 353 200 - -------------------------------------------------------------------------------- Total gross deferred tax liabilities 2,304 2,141 - -------------------------------------------------------------------------------- Net deferred tax asset, included in other assets $4,581 $5,362 ================================================================================ 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, 2000 and 1999. 42 (10) Retirement Plans 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 2000, 1999 and 1998 using the most recent actuarial data measured at September 30, 2000, 1999 and 1998: (Dollars in thousands) 2000 1999 1998 -------- -------- -------- Change in benefit obligation: Benefit obligation at beginning of year $(11,740) $(10,947) $ (8,913) Service cost (766) (673) (543) Interest cost (806) (698) (653) Actuarial gain (loss) 603 17 (1,389) Benefits paid 476 459 439 Plan expenses 119 102 112 -------- -------- -------- Benefit obligation at end of year (12,114) (11,740) (10,947) -------- -------- -------- Change in plans assets: Fair value of plan assets at beginning of year 15,706 13,509 13,395 Actual return on plan assets 1,588 2,111 595 Employer contribution 481 647 70 Benefits paid (476) (459) (439) Plan expenses (119) (102) (112) -------- -------- -------- Fair value of plan assets at end of year 17,180 15,706 13,509 -------- -------- -------- Funded status 5,066 3,966 2,562 Unamortized net asset at transition (217) (255) (293) Unrecognized net (gain) loss subsequent to transition (1,433) (552) 455 Unamortized prior service cost (57) (59) (62) -------- -------- -------- Prepaid benefit cost, included in other assets $ 3,359 $ 3,100 $ 2,662 ======== ======== ======== Pension expense consists of the following components for the years ended December 31, 2000, 1999 and 1998: (Dollars in thousands) 2000 1999 1998 ---- ---- ---- Service cost $ 766 $ 673 $ 543 Interest cost on projected benefit obligation 806 698 653 Expected return on plan assets (1,307) (1,121) (1,113) Amortization of net transition asset (38) (38) (38) Amortization of unrecognized (gain) loss - - (7) Amortization of unrecognized prior service cost (3) (3) (3) ---- ---- --- Net periodic pension expense $ 224 $ 209 $ 35 ===== ===== ===== Weighted average discount rate 7.00% 7.00% 6.50% ==== ==== ==== Expected long-term rate of return 8.50% 8.50% 8.50% ==== ==== ==== Rate of compensation increase 5.00% 5.00% 4.50% ==== ==== ==== 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 $524,000, $480,000 and $398,000, in 2000, 1999 and 1998, respectively. 43 (11) 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 option's maximum term is ten 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: For the years ended December 31 ------------------------------- 2000 1999 ---------- ---------- Net income (dollars in thousands) As Reported $ 18,100 $ 15,957 Pro forma $ 17,838 $ 15,846 Earnings per share (basic) As reported $ 1.51 $ 1.38 Pro forma $ 1.49 $ 1.37 Earnings per share (diluted) As reported $ 1.51 $ 1.38 Pro forma $ 1.49 $ 1.37 The weighted-average fair value of options granted during the years ended December 31, 2000 and 1999 amounted to $3.72 and $4.29, 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 ------------------------------- 2000 1999 ---- ---- Dividend yield 2.31% 2.16% Expected life 10.0 years 10.0 years Expected volatility 20.0% 30.0% Risk-free interest rate 6.0% 6.0% The activity in the FII stock option plans is summarized below:
2000 1999 ------------------- ------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------ -------- ------ ------- Outstanding at beginning of year 319,042 $14.00 -- $ -- Granted 70,638 13.45 319,042 14.00 Exercised -- -- -- - Forfeited 5,162 13.56 -- - ------- ------ ------- ------ Outstanding at end of year 384,518 $13.90 319,042 $14.00 ======= ====== ======= ======
At December 31, 2000, 65,986 options were exercisable and options outstanding had a weighted average remaining contractual life of 8.7 years. At December 31, 1999, none of the options were exercisable and options outstanding had a weighted average remaining contractual life of 9.5 years. 44 (12) 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, 2000 and 1999, the Company and each subsidiary bank met all capital adequacy requirements to which they are subject. As of December 31, 2000, 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, 2000, an aggregate of $5,091,000 was available for payment of dividends by the subsidiary banks to FII without the approval from the appropriate regulatory authorities.
Actual Regulatory December 31, 2000 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 Actual Regulatory December 31, 1999 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 $117,557 10.80% $43,528 4.00% $54,411 5.00% FTB 8,913 7.66 4,657 4.00 5,822 5.00 NBG 36,541 9.05 16,159 4.00 20,199 5.00 PSB 12,159 8.89 5,469 4.00 6,836 5.00 WCB 41,405 9.66 17,148 4.00 21,435 5.00 As percent of risk-weighted, period-end assets: Core capital (Tier 1): Company 117,557 14.94 31,479 4.00 47,218 6.00 FTB 8,913 12.45 2,865 4.00 4,297 6.00 NBG 36,541 11.48 12,733 4.00 19,099 6.00 PSB 12,159 12.44 3,909 4.00 5,864 6.00 WCB 41,405 14.04 11,798 4.00 17,698 6.00 Total capital (Tiers 1 and 2): Company 127,413 16.19 62,957 8.00 78,696 10.00 FTB 9,811 13.70 5,729 8.00 7,162 10.00 NBG 40,521 12.73 25,465 8.00 31,832 10.00 PSB 13,383 13.69 7,819 8.00 9,773 10.00 WCB 45,106 15.29 23,597 8.00 29,496 10.00
45 (13) 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, 2000 and 1999: 2000 1999 --------------------- -------------------- Carrying Fair Carrying Fair (Dollars in thousands) Amount Value Amount Value --------------------- -------------------- Financial Assets Securities $338,816 $338,753 $281,628 $281,173 Loans, net 873,262 897,977 752,324 749,934 Financial Liabilities Deposits: Interest Bearing: Savings and interest bearing demand 309,732 309,732 306,813 306,813 Time deposits 605,539 606,113 500,918 499,160 Non-interest bearing 162,840 162,840 141,800 141,800 --------- --------- ------- ------- Total deposits 1,078,111 1,078,685 949,531 947,773 Borrowings: Short-term 46,903 46,903 46,096 46,096 Long-term 15,481 15,382 10,240 10,065 The following methods and assumptions were used to estimate the fair value of each class of financial instruments. 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. 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. 46 (14) Segment Information Reportable segments are comprised of WCB, NBG, 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, 2000, 1999 and 1998 follows:
(Dollars in thousands) 2000 1999 1998 ----------- ----------- ----------- Net interest income: WCB ............................... $ 21,639 $ 19,415 $ 17,504 NBG ............................... 18,339 16,231 14,600 PSB ............................... 7,244 6,409 5,608 FTB ............................... 5,203 4,743 4,266 ----------- ----------- ----------- Total segment net interest income 52,425 46,798 41,978 FII, FIGI and eliminations, net ... 751 218 (66) ----------- ----------- ----------- Total net interest income ....... $ 53,176 $ 47,016 $ 41,912 =========== =========== =========== Net income: WCB ............................... $ 7,549 $ 6,774 $ 5,943 NBG ............................... 7,154 6,093 5,272 PSB ............................... 2,005 2,039 1,638 FTB ............................... 1,523 1,367 1,102 ----------- ----------- ----------- Total segment net income ........ 18,231 16,273 13,955 FII, FIGI and eliminations, net ... (131) (316) (350) ----------- ----------- ----------- Total net income ................ $ 18,100 $ 15,957 $ 13,605 =========== =========== =========== Assets: WCB ............................... $ 494,589 $ 452,353 $ 372,931 NBG ............................... 488,181 417,120 372,130 PSB ............................... 171,186 141,363 125,508 FTB ............................... 131,638 122,052 100,253 ----------- ----------- ----------- Total segment net assets ........ 1,285,594 1,132,888 970,822 FII, FIGI and eliminations, net ... 3,733 3,572 5,363 ----------- ----------- ----------- Total assets .................... $ 1,289,327 $ 1,136,460 $ 976,185 =========== =========== ===========
47 (15) Condensed Parent Company Only Financial Statements The following are the condensed statements of condition of FII as of December 31, 2000 and 1999, and the condensed statements of income and cash flows for the years ended December 31, 2000, 1999 and 1998: Condensed Statements of Condition 2000 1999 -------- -------- (Dollars in thousands) Assets: Cash and due from banks $ 17,116 $ 17,786 Securities available for sale, at fair value 1,215 1,144 Investment in subsidiaries 89,808 99,248 Accrued dividends receivable from subsidiaries 22,962 -- Other assets 4,135 4,218 -------- -------- Total assets $135,236 $122,396 ======== ======== Liabilities and equity: Long-term borrowings $ -- $ 1,698 Other liabilities 3,618 3,159 Shareholders' equity 131,618 117,539 -------- -------- Total liabilities and equity $135,236 $122,396 ======== ======== Condensed Statements of Income (Dollars in thousands) 2000 1999 1998 -------- -------- -------- Dividends from subsidiaries $ 30,115 $ 6,088 $ 5,723 Other income 6,178 5,212 4,328 -------- -------- -------- Total income 36,293 11,300 10,051 Expenses 6,190 5,542 4,715 -------- -------- -------- Income before income taxes and equity in earnings of subsidiaries 30,103 5,758 5,336 Income tax (expense) benefit (33) 93 105 -------- -------- -------- Income before equity in earnings of subsidiaries 30,070 5,851 5,441 Equity in undistributed earnings (dividends in excess of earnings) of subsidiaries (11,970) 10,106 8,164 -------- -------- -------- Net income $ 18,100 $ 15,957 $ 13,605 ======== ======== ======== 48
Condensed Statements of Cash Flows (Dollars in thousands) 2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net income $ 18,100 $ 15,957 $ 13,605 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 620 842 748 Dividends in excess of earnings (equity in undistributed earnings) of subsidiaries 11,970 (10,106) (8,164) Deferred income tax (benefit) expense (56) 58 102 Increase in accrued dividends receivable from subsidiaries (22,962) -- -- Increase in other assets (181) (141) (161) Decrease (increase) in accrued expense and other liabilities 230 (78) 454 -------- -------- -------- Net cash provided by operating activities 7,721 6,532 6,584 -------- -------- -------- Cash flows from investing activities: Equity investment in subsidiaries, net -- (154) -- Purchase of securities available for sale (140) (520) -- Purchase of premises and equipment, net (340) (319) (738) -------- -------- -------- Net cash used by investing activities (480) (993) (738) -------- -------- -------- Cash flows from financing activities: Repayment of long-term borrowings (1,698) (42) -- Repurchase of preferred and common shares, net (425) (54) (163) Dividends paid (5,788) (4,988) (3,987) Proceeds from initial public offering, net of costs -- 13,623 -- -------- -------- -------- Net cash (used in) provided by financing activities (7,911) 8,539 (4,150) -------- -------- -------- Net (decrease) increase in cash and cash equivalents (670) 14,078 1,696 Cash and cash equivalents at the beginning of the year 17,786 3,708 2,012 -------- -------- -------- Cash and cash equivalents at the end of the year $ 17,116 $ 17,786 $ 3,708 ======== ======== ========
49 Supplementary Data (Unaudited) Quarterly Financial Information
(Dollars in thousands, except share data) Diluted Net Provision Income Earnings Per Interest for Loan Before Net Common Income Losses Income Taxes Income Share ------ ------ ------------ ------ ----- 2000 ---- First quarter $12,685 $ 835 $6,712 $ 4,294 $ 0.36 Second quarter 13,204 1,172 6,960 4,449 0.37 Third quarter 13,485 1,100 7,231 4,665 0.39 Fourth quarter 13,802 1,104 7,001 4,692 0.39 1999 ---- First quarter $10,816 $ 525 $5,795 $ 3,746 $ 0.34 Second quarter 11,412 531 6,020 3,885 0.35 Third quarter 12,229 933 6,616 4,161 0.34 Fourth quarter 12,559 1,073 6,339 4,165 0.34
Stock Data Set forth below are the high, low and closing prices for the Company's common shares by quarter in 2000 and 1999. Data was supplied by NASDAQ. 2000 High Low Close First $13.250 $10.375 $11.750 Second 15.000 11.938 14.000 Third 15.438 12.375 14.875 Fourth 15.375 13.375 13.609 1999 High Low Close Second $15.625 $14.000 $15.000 Third 15.500 12.250 12.938 Fourth 14.625 12.000 12.125 50 Financial Institutions, Inc. and Subsidiaries Senior Officers Financial Institutions, Inc. Peter G. Humphrey, President & CEO John R. Koelmel, Senior Vice President and CAO Randolph C. Brown, Senior Vice President Jon J. Cooper, Senior Vice President Wolcott J. Humphrey, III, Senior Vice President Thomas L. Kime, Senior Vice President Ronald A. Miller, Senior Vice President and CFO Regina R. Colegrove, Vice President Sonia M. Dumbleton, Vice President David L. MacIntyre, Vice President R. Mitchell McLaughlin, Vice President Matthew T. Murtha, Vice President Steven S. Perl, Vice President Wyoming County Bank Jon J. Cooper President & CEO Louis J. Burgio Senior Vice President Terry K. Lowell Senior Vice President Kevin D. Maroney Senior Vice President Dana C. Gavenda Vice President Michael W. Williamson Vice President The National Bank of Geneva Thomas L. Kime President & CEO Stephen V. DeRaddo Executive Vice President Jeffery A. Friend Senior Vice President Robert W. Sollenne Senior Vice President Todd W. Andrews Vice President Bruce F. Bossard Vice President Mark J. DeBacco Vice President Jeffery E. Franklin Vice President James H. King Vice President Ronald A. Rubin Vice President Gary F. Shultz Vice President The Pavilion State Bank Wolcott J. Humphrey, III President & CEO Ted J. Habgood Senior Vice President Priscilla R. Rider Senior Vice President John R. Titus Senior Vice President Howard E. Hotze, Jr. Vice President Diane D. Torcello Vice President First Tier Bank & Trust Randolph C. Brown President & CEO Gary M. Rougeau Senior Vice President Stephen L. Foster Vice President G. Gary Gluck Vice President Brian D. Snyder Vice President FI Group Incorporated Member NASD, SIPC David L. MacIntyre, President Robert T. Koczent, Secretary 51 Financial Institutions, Inc. and Subsidiaries Advisory Board Members Wyoming County Bank Wyoming County Mark Amidon Lawrence Appleby Brent Birkland Harold Crabb Valerie Duell Ann Humphrey Christine Kennedy Vincent Liberatore Thomas Moran Timothy Moran Howard Payne Richard Reisdorf Robert Salzler James Schlick Harry Spink Gayle Wolfer Sprague Pamela Yates Livingston County Theresa Alianell Thomas Bell Philip Brooks Sally Brooks Patrick Burke Gerald Coyne Richard Essler David Gaylord Walter Isaac Steven Kruk Helen Lent Anthony Morrow Dennis Neenan Sherman Sanford Peter Scorsone Larry Scoville Geraldine Traphagen Louise Wadsworth Michael West The National Bank of Geneva Canandaigua R. Randall Farsnworth John E. Garvey Richard D. Maltman John E. Miller, Jr. Dennis A. Morga C. Marshall Seager Duane A. Thompson Penn Yan Milton L. Harman Linda J. Jackson Paul W. Marble, Jr. Daryl L. Middlebrook Neil J. Simmons William H. Sutherland Plaza Samuel G. Boncaro Richard N. Shoemaker Robert H. Stenzel Bruce R. Teague Ovid Bruce J. Austic Michael D. Karlsen Dennis M. Kenyon Martha K. Macinski Kenneth C. Reimer Stanley (Bill) Wagner Seneca County Francis C. Barrett Dr. Kenneth W. Padgett, D.C. Kenneth (Lee) Patchen, Sr. Robert L. Sessler Jane M. Shaffer William H. Sigrist Richard K. Wadhams The Pavilion State Bank Batavia Lynn Browne William Fritts Jerry Reinhart Stephan Starowitz Paul Tenney Caledonia Marjorie Carpenter Jeff Deragon Marjorie Jones Theresa Mattice Casey Randall LeRoy Robert Humphrey DeAnna Page Stella Craig Wilcox Rose Wright Ray Yacuzzo North Chili Chuck Colby Donald Ehrmentraut Ginny Morton Robert Ottley Richard Stowe Pavilion Dean Davis John Gray Robert Milligan Charlene Schoenenberger David Tillotson First Tier Bank & Trust Olean Michael Hendrix Michael Kasperski John Kwiakowski Thomas Palumbo Anthony Sanzo Cuba Jeff Bradley William Bradley, Jr. Barry Cummins Nico VanZwanenberg 52 Inside Back Cover In Memory DONALD G. HUMPHREY 1930-2001 [picture] The 2000 FII Annual Report is dedicated to the memory of Donald G. Humphrey. As a shareholder, board member and co-worker, Donald played a key role in navigating the company through the past decades. His leadership and dedication to FII leave a legacy that will never be forgotten. Donald was a true free spirit with a generous and warm-hearted outlook on life. His love of the outdoors, boating, fishing, children and our communities are indicative of the terrific person he was. He will be missed by all. Outside Back Cover Investor Information Transfer Agent ChaseMellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, New Jersey 07660 Customer Service: (800) 288-9541 Website: www.chasemellon.com Stock Listing Financial Institutions, Inc.'s common stock is listed on the NASDAQ National Market under the symbol FISI. Independent Auditors KPMG LLP Annual Meeting FII Corporate Headquarters, 220 Liberty Street, Warsaw, New York 14569, at 10:00 a.m on May 23, 2001. Website Addresses www.fiiwarsaw.com www.wycobank.com www.nbgeneva.com www.pavilionbank.com www.firsttierbank.com Financial Institutions, Inc. 220 Liberty Street P.O. Box 227 Warsaw, New York 14569 (716) 786-1100 EX-21 3 0003.txt INDEPENDENT ACCOUNTANTS' CONSENT EX-21 (Exhibit 21) Subsidiaries of Financial Institutions, Inc. FINANCIAL INSTITUTIONS, INC. Name of Subsidiary State of Incorporation ---------------------------- ------------------------ Wyoming County Bank New York The National Bank of Geneva New York The Pavilion State Bank New York First Tier Bank & Trust New York The FI Group, Inc. New York 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 Statement on Form S-8 (No. 333-76865) of Financial Institutions, Inc. of our report dated January 31, 2001, relating to the consolidated statements of financial condition of Financial Institutions, Inc. and subsidiaries as of December 31, 2000 and 1999, 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, 2000, which report is incorporated by reference in the December 31, 2000 Annual Report on Form 10-K of Financial Institutions, Inc.. /s/ KPMG LLP Buffalo, New York March 27, 2001 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-2000 DEC-31-2000 29,051 175 926 0 261,869 76,947 76,884 887,145 13,883 1,289,327 1,078,111 46,903 17,214 15,481 17,758 0 113 113,747 1,289,327 78,538 18,059 184 96,781 39,758 3,847 53,176 4,211 27 30,156 27,904 18,100 0 0 18,100 1.51 1.51 4.88 6,596 521 0 0 11,421 2,198 449 13,883 11,668 0 2,215
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