AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1999
REGISTRATION NO. 333-__________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FINANCIAL INSTITUTIONS, INC.
(Exact name of registrant as specified in charter)
NEW YORK 6022 16-0816610
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
220 LIBERTY STREET
WARSAW, NEW YORK 14569
(716) 786-1100
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
PETER G. HUMPHREY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FINANCIAL INSTITUTIONS, INC.
220 LIBERTY STREET
WARSAW, NEW YORK 14569
(716) 786-1101
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
BRUCE J. BAKER, ESQ. STEVEN R. FINLEY, ESQ.
NIXON, HARGRAVE, DEVANS & DOYLE LLP GIBSON, DUNN & CRUTCHER LLP
900 CLINTON SQUARE 200 PARK AVENUE
ROCHESTER, NEW YORK 14604 NEW YORK, NEW YORK 10166
(716) 263-1000 (212) 351-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier registration
statement for the same offering. |_| _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. |_| _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. |_| _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
CALCULATION OF REGISTRATION FEE:
- --------------------------------------------------------------------------------
Title Proposed Proposed
of Shares Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered Per Share Offering Price Fee
- --------------------------------------------------------------------------------
Common Stock,
par value $.01 1,533,333(1) $16.00(2) $24,533,328(2) $6,820
- --------------------------------------------------------------------------------
(1) Includes 200,000 shares of common stock which may be sold by the Company to
cover over-allotments.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(a) of the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL __, 1999
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
1,333,333 SHARES
[LOGO]
FINANCIAL INSTITUTIONS, INC.
COMMON STOCK
$____ PER SHARE
- --------------------------------------------------------------------------------
This is an initial public offering of common stock of Financial Institutions,
Inc. Financial Institutions is offering 903,133 shares of common stock and the
selling shareholder, the Young Men's Christian Association of Batavia, is
offering 430,200 shares of common stock with this prospectus. Financial
Institutions will not receive any proceeds from the sale of shares by the
selling shareholder. This is a firm commitment underwriting.
There is currently no public market for the shares. We expect that the price to
the public in the offering will be between $____ and $____ per share. The market
price of the shares after the offering may be higher or lower than the offering
price.
Application will be made to list the shares of common stock on the Nasdaq
National Market under the symbol ____.
OUR SHARES ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR ANY OTHER
GOVERNMENTAL AGENCY.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 10.
PER SHARE TOTAL
--------- -----
Price to the public......................... $_______.__ $____________
Underwriting discount....................... _______.__ ____________
Proceeds to Financial Institutions, Inc..... _______.__ ____________
Proceeds to the selling shareholder......... _______.__ ____________
Financial Institutions has granted an over-allotment option to the underwriters.
Under this option, the underwriters may elect to purchase a maximum of 200,000
additional shares from Financial Institutions within 30 days following the date
of this prospectus to cover over-allotments.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS KEEFE, BRUYETTE & WOODS, INC.
The date of this Prospectus is __________, 1999.
<PAGE>
At December 31, 1998 Branches Deposits
- -------------------- -------- --------------
Wyoming County Bank 11 $328.4 million
The National Bank of Geneva 6 $327.6 million
The Pavilion State Bank 5 $109.0 million
First Tier Bank & Trust 6 $89.1 million
THE NATIONAL BANK OF GENEVA
Branches
* Canandaigua - 2425 Rochester Rd & ATM
* Geneva (Town & Country Plaza) - 387
Hamilton St. & ATM
* Geneva (Main Office) - 2 Seneca St
* Geneva (Motor Bank) - 65 Elizabeth
Blackwell St & ATM
* Penn Yan - 129 Elm St & ATM
* Seneca County (Waterloo) - 1940 Routes
5 & 20 & ATM
THE PAVILION STATE BANK
Branches
@ Batavia (Eastown Plaza) - 567 East
Main St & ATM
@ Batavia (Tops Supercenter) - 390 West
Main St
@ Caledonia - 3110 Main St & ATM
@ LeRoy - 124 West Main St & ATM
@ Pavilion (Main Office) - 6948 Cato St
[Picture of New York State
highlighting the eight counties in
which Financial Institutions, Inc. and
its banks have offices and branches.
The picture also depicts the proximity
of FII's headquarters to the Cities of
Rochester and Buffalo.]
[Blown-up picture of the eight counties
in which Financial Institutions, Inc.
and its banks have offices and branches.
The location of the offices and branches
are depicted on the picture using
symbols.]
WYOMING COUNTY BANK
Branches
o Attica - 26 Main St & ATM
o Dansville - 152 Franklin St & ATM
o Geneseo - 4288 Lakeville Dr & ATM
o Lakeville - 3261 Rochester Rd & ATM
o Mount Morris - Route 408 & ATM
o North Java - 4222 Route 98
o North Warsaw - 2330 North Main St & ATM
o Strykersville - 3672 Route 78
o Warsaw (Main Office) - 55 North Main St & ATM
o Wyoming - 5 South Academy St
o Yorkshire - 12209 Route 16 & ATM
FIRST TIER BANK & TRUST
Branches
x Allegany - 60 West Main St & ATM
x Cuba - 27 Water St & ATM
x Ellicottville - 54 Washington St & ATM
x Olean - 129 North Union St
x Olean (Autobank) - 124 West State St & ATM
x Salamanca (Main Office) - 107 Main St
Mission Statement
Financial Institutions, Inc. is a multi-bank holding company that
creates and builds a value-driven and rewarding relationship with
its customers, communities, employees and stockholders.
We will continue to pursue the Super Community Banking Strategy.
<PAGE>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.....................................................4
Risk Factors..........................................................10
Forward-Looking Statements............................................15
Use of Proceeds.......................................................15
Dividend Policy.......................................................15
Capitalization........................................................16
Dilution..............................................................17
Selected Consolidated Financial Data..................................18
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................20
Business..............................................................42
Supervision and Regulation............................................49
Management............................................................55
Principal and Selling Shareholders....................................61
Certain Related Transactions..........................................62
Description of Capital Stock..........................................63
Shares Eligible for Future Sale.......................................65
Underwriting..........................................................66
Legal Matters.........................................................67
Experts...............................................................67
Where You Can Find More Information...................................67
Index to Consolidated Financial Statements...........................F-1
As used in this prospectus, the terms "we," "us," "our," the "Company" and "FII"
mean Financial Institutions, Inc. and its subsidiaries (unless the context
indicates a different meaning), and the term "common stock" means FII common
stock, $0.01 par value per share.
FII's principal executive offices are located at 220 Liberty Street, Warsaw, New
York 14569. Its telephone number is 716-786-1100.
Unless otherwise stated herein, all information contained in this prospectus
assumes no exercise of the over-allotment option granted to the underwriters.
On June __, 1999, FII effected a [100]-for-one stock split. All common share
numbers in this prospectus reflect the stock split.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order. The shares should be ready for delivery on or
about ___________, 1999 against payment in immediately available funds.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained in other parts of this prospectus.
It is not complete and may not contain all of the information that you should
consider before investing in the shares. You should read the entire prospectus
carefully.
THE COMPANY
GENERAL
We are a bank holding company headquartered in Warsaw, New York, which is
located 45 miles southwest of Rochester and 45 miles southeast of Buffalo. We
operate as what is referred to in the banking industry as a super-community bank
holding company--a bank holding company that owns multiple community banks that
are separately managed. We own 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. We were 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, we have grown through a
combination of internal growth, the opening of new branch offices and
acquisitions of a community bank and branches of other banks.
As a super-community bank holding company, our strategy has been to manage our
bank subsidiaries on a decentralized basis. We feel that this strategy provides
each bank with the flexibility to efficiently serve its markets and respond to
local customer needs. Under our structure, each bank retains its name and board
of directors as well as substantial autonomy in its day-to-day operations. The
presidents of our banks are empowered to set goals and implement employee
incentive programs to maximize their bank's performance. A significant portion
of each bank president's compensation is tied to his bank's achievement of a
range of performance targets.
While we generally operate on a decentralized basis, we have consolidated
selected lines of business, operations and support functions in order to achieve
economies of scale, greater efficiency and operational consistency. Our new
operations center, upgraded IBM AS/400 mainframe computer equipment and recently
installed Jack Henry & Associates Silverlake applications software reflect our
significant investment in the infrastructure required to centralize many of our
critical operations. We believe that by increasing our use of technology that we
have already implemented, and by further centralizing back-office operations, we
can accommodate substantial additional growth without incurring proportionately
greater operational costs.
Many of the banks we compete against are either significantly larger
super-regional financial institutions or smaller community banks. Our
super-community banking strategy competitively positions us as one of the few
mid-sized financial institutions in our market that combines responsive
community banking with the sophistication, capacity and range of services and
products of a larger regional bank holding company.
On December 31, 1998, we had assets of $976.2 million, loans of $655.4 million,
deposits of $850.5 million and shareholders' equity of $96.6 million. For the
year ended December 31, 1998, our net income was $13.6 million and we earned a
return on average common equity of 16.28% and a return on average assets of
1.48%. We have a strong record of financial performance with compounded annual
growth rates for the five year period ended December 31, 1998 of 11.3% in total
assets, 11.4% in total loans and 14.5% in net income available to common
shareholders. Our revenue increased at an average annual rate of 10.1% during
this five year period, while our noninterest expense increased by only 7.9% per
year. Our efficiency ratio, which is our noninterest expense excluding other
real estate expense divided by our tax-equivalent net interest income plus
noninterest income, was 48.3% for the year ended 1998 and has been below 50%
since 1995. Our efficiency ratio ranks us in the top 10% of the most efficient
bank holding companies in our peer group according to the Federal Reserve
Board's Uniform Bank Holding Company Performance Report dated December 31, 1998.
BUSINESS
We operate 28 branches and have 35 automated teller machines or ATMs in eight
contiguous counties of Western and Central New York State: Allegany,
Cattaraugus, Genesee, Livingston, Ontario, Seneca, Wyoming and Yates
4
<PAGE>
Counties. We have opened five new branches in the past four years, and we expect
to open a new branch in Monroe County in the second half of 1999. This new
branch will be our first branch in the county in which Rochester is located. The
following table lists, as of December 31, 1998, each of our banks and their
respective date of founding, number of branches, total assets and total
deposits:
<TABLE>
<CAPTION>
YEAR NUMBER OF TOTAL TOTAL
FOUNDED BRANCHES ASSETS DEPOSITS
------- -------- ------ --------
(in millions)
<S> <C> <C> <C> <C>
Wyoming County Bank (New York State-Chartered) 1851 11 $372.9 $328.4
The National Bank of Geneva (Federally Chartered) 1817 6 372.1 327.6
The Pavilion State Bank (New York State-Chartered) 1928 5 125.5 109.0
First Tier Bank & Trust (New York State-
Chartered; Federal Reserve System Member) 1902 6 100.3 89.1
</TABLE>
Our banks provide a wide range of consumer and commercial banking services and
products to individuals, municipalities and small and medium size businesses,
including agribusiness. Our consumer banking services include checking and
savings accounts, money market accounts, debit and credit cards, certificates of
deposit, individual retirement accounts, mutual funds and annuities, home equity
lines of credit, residential mortgage loans, home improvement loans, student
loans, automobile loans, personal loans, safe deposit boxes and Christmas clubs.
Our commercial and agricultural banking services and products include business
checking accounts, cash management accounts, commercial and agricultural working
capital and revolving lines of credit, commercial and agricultural mortgages,
equipment loans and leases, crop and cattle loans, letters of credit and
accounts receivable factoring. We also provide payroll direct deposit and cash
management services and act as a depository and collection agent for municipal
tax receipts.
While our banks function as community banks, we strive to provide our customers
with a broad range of competitive services generally provided only by larger,
regional banks. Currently, we provide customers with 24 hour ATM access,
telephone customer service and 24 hour automated telephone account access. We
also provide interactive internet banking and bill paying services through each
of our banks and provide general bank information through our web sites. We are
planning to introduce a corporate cash management account module to the existing
internet banking program during the second quarter of 1999.
Our primary source of revenue is our loan portfolio. Many of our loans are
approved at the individual bank level and many consumer loans are approved at
the local branch level. Each bank's loans are internally reviewed to ensure that
sound underwriting standards are consistently applied. We actively manage the
loan portfolio at both the holding company and bank level from the standpoint of
credit, interest rate and sector risk. We use a third party loan review firm to
systematically review the commercial and agricultural loan portfolios originated
and maintained by each of our banks. The following table describes the
composition of our loan portfolio as of December 31, 1998:
PRINCIPAL AMOUNT OF PERCENTAGE OF TOTAL
TYPE OF LOANS LOANS OUTSTANDING LOANS OUTSTANDING
------------- ----------------- -----------------
(in millions)
Commercial $117.8 17.9%
Commercial real estate 106.9 16.3
Agricultural 123.7 18.9
Residential real estate 182.2 27.8
Consumer and home equity 125.2 19.1
----- ----
Total loans $655.8 100.0%
===== =====
Our noninterest revenues consist of deposit service fees, fees from servicing
mortgage loans that we originated and sold which, as of December 31, 1998, had
an aggregate principal balance of $177.8 million, commissions from selling
mutual fund and variable annuity products through a third-party broker-dealer
and other service fees from ancillary services and products. We are in the
process of expanding the trust operations of our banks beyond the two which
currently have trust powers and establishing our own brokerage operation to
enable us to expand the scope of investment products that we offer and to
complement our trust business. We are also exploring the acquisition of
insurance agency operations to further enhance our position as a full-service
provider of financial services.
5
<PAGE>
OUR MARKET POSITION
As of June 30, 1998, according to FDIC-published data, we had the largest
deposit market share in Livingston, Wyoming and Yates Counties, the second
largest share in Ontario County, the third largest share in Genesee and
Cattaraugus Counties and the fifth largest share in Allegany County. Our core
deposits, which include all of our deposits other than certificates of deposit
in amounts of $100,000 or more, comprise 79.8% of all of our deposits. In 1997,
Wyoming County Bank ranked as the largest agricultural lender in New York State
and the eighth-largest lender in the United States under the
federally-guaranteed Farm Services Administration program. It was also ranked as
the "friendliest small business lender" in New York State in the $100 million -
$500 million asset size category by the U.S. Small Business Administration in
1997. Wyoming County Bank is a "Preferred Lender" under the SBA's programs and a
"Certified Preferred Lender" under the FSA's programs.
Our market area is geographically and economically diversified because we serve
both rural markets and, increasingly, the larger more affluent markets of
suburban Rochester and suburban Buffalo. Our rural markets have a diverse
economic base which includes farming and farm-related industry, light and heavy
manufacturing, educational facilities, natural resources and tourism. The
variety of our rural customer base allows us to spread our lending risk
throughout a number of different industries. The metropolitan economies of
Rochester and Buffalo provide us with the opportunity to further diversify the
industries represented in our loan portfolio. 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. We anticipate
allocating more resources to increase our presence in the markets around these
two cities. By doing so, we hope to fill the void created by the acquisition of
many of the independent community banks that once served those areas.
We believe that we have a competitive advantage in the Western and Central New
York banking market because we have deep roots in the region, we have a dominant
market share in the communities we serve and our super-community banking
structure enables our banks to offer a broad range of services and products and
to effectively respond to local market opportunities. The sale to larger banks
of a number of mid-size community banks and thrifts serving our market,
including Rochester Community Savings Bank, Central Trust Company, First Federal
Savings and Loan Association of Rochester, Onbank and First National Bank of
Rochester, has created opportunities for us to capture the allegiance of
customers alienated by these acquisitions. We believe that the remaining large
banks in our market will find it increasingly difficult to remain competitive in
the more rural areas and will likely continue to refocus their resources toward
the more urban areas. We feel that we are well positioned to attract customers
disaffected with the metropolitan focus of these large banks and to be a
competitive acquiror of any branches sold by the large banks who choose to
reduce their operations in the rural markets. Further, we believe that we are
well positioned to be an attractive acquiror of community banks in our market
who may choose to affiliate with a larger, locally-based institution with a
broader range of services, products and back-office support.
We have a track record of successfully negotiating the acquisition of and
integrating bank branches and small banks. Our historical acquisition activity
has included the purchase of Wyoming County Bank's Attica branch from Security
Trust Company in 1984, Salamanca Trust Company (now First Tier Bank & Trust) in
1990, First Tier Bank & Trust's Allegany branch from Manufacturer's Hanover
Trust in 1992 and two branches in Yates County (acquired by The National Bank of
Geneva) and Livingston County (acquired by Wyoming County Bank) from the
Resolution Trust Corporation as receiver of Columbia Federal Savings Bank in
1994. All of our acquisitions have been profitably integrated into our
operations.
OUR GROWTH STRATEGY
Our primary business objectives are to profitably grow and diversify our
business and be the dominant financial services provider in our market.
Strategic planning on both a holding company and bank level is an integral part
of our business. Key elements of our strategy for future growth include:
* Expand Traditional Banking Base--expand our traditional banking base by
increasing the number of households and businesses served in our market
and targeted new markets by providing a high level of customer service,
opening new branch offices, making strategic acquisitions of branches
and community banks, competing for customers of recently acquired banks
in our market area, offering attractive services and products at
competitive pricing and implementing new technologies and delivery
systems;
6
<PAGE>
* Strengthen Sales Culture--maximize the number of bank services and
products used by each of our customers by actively training employees to
cross-sell various services and products, expanding our software and use
of other systems to identify cross-selling opportunities and providing
performance incentives to our managers and employees to cross-sell
services and products;
* Increase Noninterest Revenues--increase our noninterest revenues by
offering expanded and new fee-based bank services and products,
broadening the scope of our investment and insurance products, growing
our trust services, establishing brokerage operations and evaluating
other types of services that we can offer;
* Focus on Efficiency--seek to improve our efficiency ratio by continuing
to maintain tight control of overhead and expenses and further
centralizing common functions presently performed by all four banks to
the extent that such centralization can be accomplished without
undermining the benefits of our super-community banking model;
* Preserve Conservative Credit and Interest Rate Risk Profile--continue
our commitment to preserve our asset quality through a conservative
credit culture and continue to actively manage our exposure to interest
rate risk; and
* Retain and Attract Talented Employees--maintain and enhance effective
performance-based compensation and human resource management programs to
retain, attract and incent talented and motivated management, employees
and directors.
THE OFFERING
Common stock being offered by us...... 903,133 shares
Common stock being offered by the
YMCA of Batavia.................... 430,200 shares
Common stock to be outstanding
after the offering................. 10,818,733 shares
Purpose of the offering............... One purpose of this offering is to
provide us with greater flexibility to
structure and finance the ongoing growth
and diversification of our banking
operations.
Use of proceeds....................... The estimated net proceeds to us of the
offering (approximately $___ million)
will be used for general corporate
purposes, including possible future
acquisitions. We will not receive
proceeds from the sale of shares by the
YMCA of Batavia. We anticipate that the
YMCA of Batavia will sell all 430,200
shares contributed to it by members of
the Humphrey family and will use the
proceeds to finance various programs and
capital projects, including the
construction of a new YMCA in Warsaw,
New York.
Risk factors.......................... See "Risk Factors" for a discussion of
certain factors that you should
consider.
Proposed Nasdaq National
Market symbol...................... _____
Anticipated dividends................. We initially plan to pay quarterly
dividends of $0.07 per share following
the offering. See "Risk Factors--Our
Dividends may Fluctuate" and "Dividend
Policy" for a discussion of certain
factors that will affect our ability to
pay dividends.
7
<PAGE>
<TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share data)
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income........................ $72,870 $67,168 $61,192 $57,016 $46,432
Interest expense....................... 30,958 27,851 24,514 22,628 16,635
------ ------ ------ ------ ------
Net interest income.................... 41,912 39,317 36,678 34,388 29,797
Provision for loan losses.............. 2,732 2,829 1,740 1,405 1,232
----- ------ ------ ------ ------
Net interest income after provision
for loan losses...................... 39,180 36,488 34,938 32,983 28,565
Noninterest income..................... 6,381 5,733 5,165 4,405 3,923
Noninterest expense.................... 24,602 22,084 19,796 20,062 18,807
------ ------ ------ ------ ------
Income before income taxes............. 20,959 20,137 20,307 17,326 13,681
Income taxes........................... 7,354 7,295 7,232 6,223 4,579
----- ----- ----- ----- -----
Net income............................. 13,605 12,842 13,075 11,103 9,102
Preferred dividends.................... 1,506 1,513 1,522 1,523 1,523
----- ----- ----- ----- -----
Net income available to common......... $12,099 $11,329 $11,553 $9,580 $7,579
======= ======= ======= ====== ======
PER COMMON SHARE DATA:
Net income per common share............ $1.22 $1.14 $1.16 $0.96 $0.76
Book value............................. $7.94 $6.94 $5.96 $5.02 $3.92
Tangible book value.................... $7.54 $6.46 $5.40 $4.37 $3.18
Cash dividends declared................ $0.26 $0.22 $0.20 $0.18 $0.09
Common dividend payout ratio........... 21.43% 19.28% 16.78% 18.16% 11.82%
Weighted average shares outstanding.... 9,915,921 9,926,678 9,939,197 9,944,559 9,949,800
Shares outstanding at end of period.... 9,915,600 9,928,500 9,927,700 9,940,200 9,946,200
BALANCE SHEET DATA:
Total assets........................... $976,185 $880,512 $802,266 $721,994 $672,807
Securities............................. 248,038 209,207 189,843 185,445 198,225
Loans.................................. 655,427 602,477 552,188 481,005 420,969
Allowance for loan losses.............. 9,570 8,145 7,129 6,183 5,303
Total deposits......................... 850,455 767,726 707,703 640,237 607,097
Borrowings............................. 13,862 12,066 5,814 1,739 1,739
Preferred equity....................... 17,858 17,927 18,052 18,075 18,086
Common equity.......................... 78,720 68,916 59,202 49,926 38,980
Total shareholders' equity............. 96,578 86,843 77,254 68,001 57,066
AVERAGE BALANCE SHEET DATA:
Total assets........................... $918,408 $834,786 $763,789 $702,671 $628,624
Securities............................. 227,352 197,992 192,860 197,722 180,022
Loans.................................. 621,418 571,877 511,033 448,509 392,574
Allowance for loan losses.............. 8,910 7,370 6,634 5,692 4,869
Total deposits......................... 798,954 730,098 677,244 628,796 566,879
Borrowings............................. 13,635 10,585 2,856 1,999 3,124
Preferred equity....................... 17,883 17,980 18,073 18,082 18,095
Common equity.......................... 74,323 64,286 55,375 44,892 37,884
Total shareholders' equity............. 92,206 82,266 73,448 62,974 55,979
PERFORMANCE RATIOS:
Return on average assets............... 1.48% 1.54% 1.71% 1.58% 1.45%
Return on average common equity........ 16.28% 17.62% 20.86% 21.34% 20.01%
Net interest margin (tax-equivalent)... 5.06% 5.21% 5.31% 5.40% 5.25%
Efficiency ratio....................... 48.31% 47.02% 45.47% 49.69% 53.30%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSET QUALITY RATIOS:
Excluding impact of government guarantees
on portion of loan portfolio:
Nonperforming loans to total loans. 0.93% 1.24% 1.06% 0.89% 0.81%
Nonperforming assets to total
loans and other real estate...... 1.24% 1.62% 1.38% 1.21% 1.04%
Net loan charge-offs to
average loans.................... 0.21% 0.32% 0.16% 0.12% 0.12%
Allowance for loan losses to
total loans...................... 1.46% 1.35% 1.29% 1.29% 1.26%
Allowance for loan losses to
nonperforming loans.............. 156.86% 108.95% 121.51% 143.76% 155.24%
Including impact of government guarantees
on portion of loan portfolio:
Nonperforming loans, net of
government guaranteed portion,
to total loans................... 0.71% 1.00% 0.79% 0.76% 0.76%
Nonperforming assets, net of
government guaranteed
portion, to total loans and
other real estate................ 1.03% 1.38% 1.12% 1.07% 0.99%
Allowance for loan losses to
nonperforming loans, net of
government guaranteed portion.... 204.49% 134.67% 162.43% 169.86% 165.31%
CAPITAL RATIOS:
Average common equity to
average total assets................. 8.09% 7.70% 7.25% 6.39% 6.02%
Leverage ratio......................... 9.58% 9.53% 9.05% 8.57% 7.65%
Tier 1 risk-based capital ratio........ 13.71% 13.58% 13.25% 12.76% 11.08%
Risk-based capital ratio............... 14.96% 14.81% 14.50% 14.01% 12.31%
Intangibles to tangible common equity.. 5.29% 7.48% 10.52% 14.90% 23.09%
</TABLE>
All of the per share data in the table above has been adjusted to reflect the
[100]-for-one stock split effected on June __, 1999. The tangible book value per
common share was calculated by dividing common shareholders' equity less
goodwill, by common shares outstanding at end of the applicable period. For
purposes of computing performance ratios, all interim periods have been
annualized. A 35% federal income tax rate was used for computing the net
interest margin on a tax equivalent basis. The efficiency ratio was calculated
by dividing total noninterest expense less other real estate expense by
tax-equivalent net interest income plus noninterest income other than securities
gains and losses. Except for the ratio of net loan charge-offs to average loans
and the ratio of average common equity to average total assets, all asset
quality ratios and capital ratios have been stated as of the end of the
applicable period. As used in the table, nonperforming loans include nonaccrual
loans, restructured loans and accruing loans 90 days or more delinquent.
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 U.S. Small Business Administration
or the Farm Service Agency of the U.S. Department of Agriculture.
9
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus before deciding to invest in our common stock.
Investing in the common stock will provide you with an equity ownership interest
in FII. As an FII shareholder, you will be subject to risks inherent in our
business. The value of your investment may increase or decrease and could result
in a loss. The common stock does not constitute a deposit or other obligation of
a bank and is not insured by the Federal Deposit Insurance Corporation ("FDIC")
or any other governmental agency.
OUR PROFITABILITY MAY BE ADVERSELY AFFECTED BY CHANGES IN INTEREST RATES
Our profitability depends largely on our net interest income, which is the
difference between the interest we receive from loans and investments and the
interest we pay on deposit liabilities and borrowings. Changes in interest rates
may adversely affect our profitability. Interest rates are sensitive to many
factors, including general economic conditions and the policies of government
and regulatory authorities. Changes in interest rates can also have other
significant effects on our mortgage origination business. In periods of rising
interest rates, financial institutions such as FII typically originate fewer
mortgage loans. In that case, our mortgage interest income may decline. In
periods of declining interest rates, borrowers typically prepay existing
mortgages by refinancing. When loans that we service are prepaid, it reduces our
income from servicing mortgage loans. Changes in the difference between short
and long-term interest rates (commonly known as the "yield curve") may also harm
our business. If the difference between short-term and long-term interest rates
shrinks or disappears, we would earn less interest income on mortgages that we
retain.
OUR PERFORMANCE DEPENDS ON LOCAL ECONOMIC CONDITIONS
Adverse changes in our local market economies may have a material adverse effect
on our business. Our business depends heavily on general economic conditions
within our primary market areas, which have seen limited economic growth in the
past decade. Our primary market areas are substantially rural, which limits our
prospects for growth. Further, the profitability of dairy farming is affected by
changes in milk prices, which have been kept artificially high in recent years
and may decline. We have many outstanding loans to dairy farmers and a
significant decline in milk prices could render such farmers unable to repay
their loans when due.
OUR LENDING INVOLVES RISKS
All lending involves the risk that borrowers may default on their loans. Most
industry experts believe that agricultural, commercial and consumer loans expose
a lender to a greater risk of loss than one- to four-family residential loans.
At December 31, 1998, our portfolio was comprised of the following types of
loans:
PRINCIPAL AMOUNT OF PERCENTAGE OF TOTAL
TYPE OF LOANS LOANS OUTSTANDING LOANS OUTSTANDING
------------- ----------------- -----------------
(in millions)
Commercial $117.8 17.9%
Commercial real estate 106.9 16.3
Agricultural 123.7 18.9
Residential real estate 182.2 27.8
Consumer and home equity 125.2 19.1
----- ----
Total loans $655.8 100.0%
===== =====
Although the majority of our loans are secured by collateral such as real
property, equipment, accounts receivable, cattle or crops, the value of this
collateral depends both on the accuracy and currency of independent appraisals
and on the ability of our banks, in the event of a foreclosure, to realize the
full value of the collateral. The value of collateral such as farmland, farm
equipment, construction equipment, cattle, crops and receivables generated by
agricultural and construction-related businesses may be adversely affected by
falling prices for farm commodities or a decline in construction work in our
area. In addition, many of our commercial loans are collateralized by personal
10
<PAGE>
guarantees of the owners of the farm or business obtaining the loan. In the
event the personal financial condition of the guarantors deteriorates, these
guarantees may be of limited value.
There is additional lending risk inherent in our decentralized management
structure. Because most loans are made at the branch or individual bank level,
there are a number of loan officers with the ability to approve loans. This
increases the possibility of errors, noncompliance with underwriting standards
and fraud. One of our banks faces additional lending risks because it owns real
property and holds mortgages on land owned by a sovereign Indian nation, which
could have ownership rights superior to its rights. As of December 31, 1998, the
total amount of such real property and the principal amount of loans secured by
such mortgages was $3.7 million.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We are dependent on our key personnel, including Peter G. Humphrey and the
presidents of our four banks. The loss of Mr. Humphrey or other members of
senior management could have an adverse effect on us. See "Management."
OUR BUSINESS IS HIGHLY COMPETITIVE
We compete with other commercial banks, savings banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies and other financial institutions, as well as with retail stores which
offer credit programs and governmental agencies. Many of our competitors have
greater financial strength, marketing capability and name recognition than we
do, and operate on a statewide or nationwide basis. In addition, recent
developments in technology and mass marketing have permitted larger companies to
market loans more aggressively to our small business customers. Such advantages
may give our competitors opportunities to realize greater efficiencies and
economies of scale than we can. Competition for loans and deposits reduces
interest rate spreads, which reduces our net interest income. Our competition is
intense, and we expect that it will continue to be.
OUR BUSINESS IS HIGHLY REGULATED
We and our banks operate in a highly regulated environment and are subject to
supervision and examination by several federal and state regulatory agencies,
including the Federal Reserve Board, the FDIC, the Office of the Comptroller of
the Currency and the New York State Banking Department. The laws and regulations
administered by these agencies are intended primarily for the protection of
depositors and customers, rather than for the benefit of investors in our stock.
Federal laws and regulations govern numerous matters including adequate capital
and financial condition, permissible types, amounts and terms of extensions of
credit and investments, permissible non-banking activities and restrictions on
dividend payments. The federal and state regulators have extensive discretion
and power to prevent or remedy unsafe or unsound practices or violations of law
by banks and bank holding companies. Following periodic examinations by
regulatory agencies, we may be required, among other things, to change our asset
valuations or the amounts of required loss allowances or to restrict our
operations. Such actions would result from the regulators' judgments based on
information available to them at the time of their examination. The banks'
operations are also subject to a wide variety of state and federal consumer
protection and similar statutes and regulations. Such federal and state
regulatory restrictions limit the manner in which FII and the banks may conduct
business and obtain financing. We are subject to changes in federal and state
laws, as well as changes in regulations and governmental policies, income tax
laws and accounting principles. The Federal Reserve Board has adopted a policy
that can require a bank holding company to contribute cash to its bank
subsidiaries, which could have the effect of decreasing funds available for
distributions to our shareholders. In addition, in certain circumstances we
could be required to guarantee the capital plan of an undercapitalized bank
subsidiary.
OUR DIVIDENDS MAY FLUCTUATE
The declaration and payment of dividends on our common stock will depend upon
our earnings and financial condition, liquidity and capital requirements, the
general economic and regulatory climate, our ability to service any equity or
debt obligations senior to the common stock and other factors deemed relevant by
our Board of Directors. While we currently pay cash dividends on our common
stock, there can be no assurance that we will do so in the future. Federal
Reserve Board policies may restrict our ability to pay cash dividends and the
ability of our
11
<PAGE>
subsidiary banks to pay dividends to us. As of December 31, 1998 an aggregate of
approximately $16.5 million was available for payment of dividends to us by our
banks without regulatory approval. In addition, we are required to pay preferred
stock dividends, which totaled $1.5 million in 1998. This is a significant
commitment of earnings which could limit our ability to pay dividends on our
common stock.
OUR MANAGEMENT HAS CONTROL OVER SHAREHOLDER DECISIONS
After the completion of this offering, our executive officers and directors will
beneficially own 2,026,300, or 18.7%, of the outstanding shares of common stock
and Donald G. Humphrey, W. J. Humphrey, Jr., Margaret H. Wyckoff, their children
and grandchildren, and their respective immediate family members will own
6,984,900, or 64.6%, of the outstanding shares of common stock. In addition,
Wyoming County Bank will own 650,100, or 6.6%, of the outstanding shares of
common stock after the offering in its capacity as trustee of trusts established
by members of the Humphrey family. Members of the Humphrey family as a group
will be able to significantly influence our management policies and decisions
and matters which require a shareholder vote. Their interests, and the interests
of the executive officers and directors who are members of the Humphrey family,
may differ from the interests of other shareholders with respect to management
issues.
YOUR INVESTMENT WILL BE SUBJECT TO DILUTION
Investors purchasing shares in the offering will incur immediate dilution of
approximately _____% in their investment, as our tangible book value after the
offering will be approximately $_____ per share compared with the initial public
offering price of $_____ per share.
OUR STOCK PRICE MAY BE AFFECTED WHEN ADDITIONAL SHARES ARE SOLD
If our shareholders sell substantial amounts of our common stock in the public
market following this offering, the market price of our common stock could fall.
Even the market's perception of the potential for a sale of a significant amount
of our common stock may depress the market price of the common stock. This might
make it more difficult for us to sell equity securities in the future.
Our directors, executive officers and certain shareholders, who together will
own approximately _____ shares of our stock subsequent to this offering, have
each entered into a lock-up agreement in which they agreed that, in general,
without the prior written consent of CIBC Oppenheimer Corp. on behalf of the
underwriters, they will not, during the period ending 180 days after the date of
this prospectus, sell or agree to sell our common stock. Following the
expiration of these agreements, shares held by those persons may be sold in the
public market subject to applicable securities laws. Sales of a substantial
number of these shares, or the perception that they may be sold, could adversely
affect the market price of our stock.
In addition, we have reserved an aggregate of ________ shares of common stock
for issuance to employees, officers, directors and consultants upon the exercise
of stock options which may be granted. Stock options entitle the holders to
purchase shares of common stock during a particular period at a specified
exercise price per share. The holders of options will usually exercise them at a
time when the market price of our common stock is greater than the exercise
price of the options. The exercise of options and subsequent sale of common
stock could reduce the market price for our common stock and result in dilution
to our shareholders.
WE ARE EXPOSED TO YEAR 2000 RISK
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
We rely on computer systems and computer software programs extensively in order
to conduct our business. In similar fashion, most of our commercial borrowers
and depositors are also heavily dependent on computer systems
12
<PAGE>
and software, as are their suppliers and customers. The software for our systems
is provided through outside vendors who have warranted to us that their products
are fully Year 2000 compliant. If their products are in fact not Year 2000
compliant, we may be required to purchase new software from other vendors which
could result in operational delays and increase our costs. We also could be sued
by our customers in the event we are unable to process transactions or if we
process transactions incorrectly. We also could be subject to regulatory
enforcement proceedings, including fines and consent orders, in the event our
regulators determine that our failure to be Year 2000 compliant affects our
safety and soundness or the safety and soundness of any of our subsidiary banks.
As of the end of 1998, we have spent approximately $100,000 to upgrade our
systems. We may incur additional unanticipated costs to make our systems Year
2000 compliant. These additional costs could hurt our operating results.
We cannot accurately gauge the impact of Year 2000 non-compliance by third
parties with which our banks and we transact business. In the event a major
customer is non-Year 2000 compliant, it could negatively impact the customer's
business and might result in the inability of the customer to repay its loans.
Depositors who experience increased cash needs may withdraw funds on deposit. If
enough of our customers experience these types of difficulties, both our
liquidity and our loan loss experience could be negatively affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Year 2000 Compliance."
THERE IS NO PRIOR TRADING MARKET FOR OUR STOCK
We have applied for approval for quotation of our common stock on the Nasdaq
National Market under the symbol _____. CIBC Oppenheimer Corp. and Keefe,
Bruyette & Woods, Inc. intend to make a market in our common stock but are under
no obligation to do so. We cannot assure you that an active public market for
our stock will develop or be sustained after this offering.
OUR STOCK PRICE MAY BE VOLATILE
The initial public offering price for our common stock has been determined by
negotiations between us and the underwriters and may not be indicative of the
market price of the common stock after the offering. We cannot assure you that
the market price of our common stock will not decline below the initial public
offering price.
WE HAVE DISCRETION OVER THE USE OF THE OFFERING PROCEEDS
We have no specific plans or allocations for the proceeds of this offering other
than for general corporate purposes, including the support of anticipated
balance sheet growth and possible future acquisitions. We will have broad
discretion with respect to the expenditure of the proceeds of the offering.
OUR RETURN ON EQUITY MAY GO DOWN
At the end of 1998, our ratio of shareholders' equity to total assets was 9.9%.
Our equity will increase significantly as a result of the offering. It will take
time to prudently deploy the offering proceeds. As a result, until we use the
capital raised in this offering to leverage growth in our interest-earning
assets and interest-bearing liabilities, which will reduce our equity as a
percentage of assets, our return on equity will be reduced. There can be no
assurance that we will be able to successfully deploy the offering proceeds, or
that we will be successful in generating future returns on equity equal to our
historical returns.
OUR ANTI-TAKEOVER PROVISIONS MAY AFFECT THE VALUE OF OUR STOCK
Our Certificate of Incorporation and By-laws contain certain provisions which
may delay, discourage or prevent an attempted acquisition or change of control.
In addition, certain provisions of New York law may delay, discourage or prevent
an attempted acquisition or change in control. These considerations could
adversely affect the market price of our stock.
13
<PAGE>
YOU MAY NEED REGULATORY APPROVAL TO ACQUIRE OUR STOCK
Individuals, alone or acting in concert with others, seeking to acquire 10% or
more of any class of our voting securities must comply with the Change in Bank
Control Act, which requires the prior approval of the Federal Reserve Board for
any such acquisition. If you seek to acquire 5% or more of any class of our
voting securities or to otherwise control us, you may be required to obtain the
prior approval of the Federal Reserve Board.
14
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. Forward-looking statements
typically are identified by use of terms such as "may," "will," "should,"
"might," "expect," "anticipate," "estimate" and similar words, although some
forward-looking statements are expressed differently. You should be aware that
our actual results could differ materially from those contained in the
forward-looking statements due to a number of factors. You should carefully
consider the statements under "Risk Factors" and other sections of this
prospectus which address additional factors that could cause our actual results
to differ from those set forth in the forward-looking statements.
USE OF PROCEEDS
The net proceeds to be received by us from the offering, after deducting the
underwriting discount and estimated offering expenses, are estimated to be
approximately $_____ million, or $_____ million if the underwriters'
over-allotment option is fully exercised. Although we have no specific plans for
the net proceeds, we have elected to proceed with an offering at this time in
order to have funds available to support anticipated balance sheet growth and to
use in connection with any future acquisition opportunities that we may decide
to pursue.
Pending the application of the net proceeds, we intend to invest such proceeds
in short-term, interest-bearing securities, certificates of deposit or
guaranteed obligations of the United States.
We will not receive proceeds from the sale of shares by the YMCA of Batavia. It
is anticipated that the YMCA of Batavia will use the proceeds from its sale of
shares to finance various programs and capital projects, including the
construction of a new YMCA in Warsaw, New York.
DIVIDEND POLICY
Holders of common stock are entitled to receive dividends when, as and if
declared by our Board of Directors out of funds legally available therefor.
While we have paid dividends on our common stock since 1994 and presently intend
to pay an initial quarterly dividend of $0.07 per share (which will be pro-rated
for dividends relating to periods of less than a full quarter); however, there
is no assurance that we will pay dividends in the future. In addition, as
discussed more fully in "Risk Factors--Our Dividends May Fluctuate", our
obligation to pay regular dividends to the holders of our two classes of
preferred stock may also impact our ability to pay dividends on our common
stock.
For the foreseeable future, our principal source of cash revenues will be
dividends paid by our four subsidiary banks on the capital stock of the banks
that we own. There are certain restrictions on the payment of such dividends
imposed by federal and state banking laws, regulations and authorities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Liquidity and Capital Resources" and
"Supervision and Regulation--The Banks."
The declaration and payment of dividends on our common stock will depend upon
our earnings and financial condition, liquidity and capital requirements, the
general economic and regulatory climate, our ability to service any equity or
debt obligations senior to the common stock and other factors deemed relevant by
our Board of Directors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Supervision and Regulation--The Banks" and
"Description of Securities of the Company." As of December 31, 1998, an
aggregate of approximately $16.5 million was available for payment of dividends
by the subsidiary banks to us under applicable restrictions without regulatory
approval. Regulatory authorities could impose administratively stricter
limitations on the ability of the four subsidiary banks to pay dividends to us
if such limits were deemed appropriate to preserve certain capital adequacy
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition--Liquidity and Capital Resources"
and "Supervision and Regulation."
15
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization as of December
31, 1998 on a historical basis and as adjusted to give effect to the sale by us
of 903,333 shares of common stock offered hereby, at an assumed offering price
of $_____ per share, net of the underwriting discount and other estimated
offering expenses. See "Use of Proceeds."
DECEMBER 31, 1998
---------------------------
ACTUAL AS ADJUSTED
------ -----------
(dollars in thousands)
Borrowings........................................ $13,862
Shareholders' Equity:
3% Cumulative Preferred stock; $100 par
value, 10,000 shares authorized; 1,842
shares issued and outstanding................ 184
8.48% Cumulative Preferred stock; $100 par
value, 200,000 shares authorized; 176,734
shares issued and outstanding................ 17,673
Common stock, $.01 par value; 50,000,000
shares authorized; 10,200,400 shares
issued, 9,915,600 shares outstanding;
_______ shares issued and ________
shares outstanding, as adjusted.............. 102
Additional paid-in capital..................... 2,837
Retained earnings.............................. 75,167
Accumulated other comprehensive income......... 1,141
Less common stock held in treasury, at cost.... (526)
-------
Total shareholders' equity........................ 96,578
------
Total capitalization.............................. $110,440
=======
Leverage capital ratio............................ 9.58%
Tier 1 capital ratio.............................. 13.71%
Total capital ratio............................... 14.96%
16
<PAGE>
DILUTION
Our net tangible book value on December 31, 1998 was approximately $74.8
million, or $7.54 per share. "Net tangible book value" is common shareholders'
equity less intangible assets. "Net tangible book value per common share" is net
tangible book value divided by the total number of common shares outstanding
before the offering.
After giving effect to certain adjustments relating to the offering, our pro
forma net tangible book value on December 31, 1998 would have been $_____, or
$_____ per common share. The adjustments made to determine pro forma net
tangible book value per common share are: (1) an increase in total assets to
reflect the net proceeds of the offering as described under "Use of Proceeds"
(assuming that the public offering price will be $_____ per common share and
before deducting the underwriting discount and estimated expenses of the
offering), and (2) the addition of the 903,333 shares offered by us under this
prospectus to the number of common shares outstanding.
If the underwriters exercise their over-allotment option in full, the pro forma
net tangible book value per common share would be $____ and dilution of net
tangible book value per common share to new investors would be $____.
The following table illustrates the pro forma increase in net tangible book
value of $_____ per common share and the dilution to new investors, which is the
difference between the offering price per share and net tangible book value per
common share.
Assumed public offering price per share................. $_____
Net tangible book value per common share as of
December 31, 1998..................................... $_____
Increase in net tangible book value per common share
attributable to the offering.......................... _____
Pro forma net tangible book value per common share as of
December 31, 1998 after giving effect to the offering.. _____
Dilution per common share to new investors in
the offering........ .................................. $
=====
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share data)
This section presents selected historical financial data of FII. You should read
carefully the financial statements included in this prospectus, including the
notes to the financial statements. The selected data in this section is not
intended to replace the financial statements.
We derived the consolidated statement of income data for the years ended
December 31, 1998, 1997 and 1996, and consolidated statements of financial
condition data as of December 31, 1998 and 1997, from the audited consolidated
financial statements in this prospectus. We derived the consolidated statement
of income data for the years ended December 31, 1995 and 1994, and consolidated
statements of financial condition data as of December 31, 1996, 1995 and 1994,
from consolidated audited financial statements which are not included in this
prospectus. Our consolidated financial statements as of and for the years ended
December 31, 1998, 1997, 1996 and 1995 have been audited by KPMG LLP. Our
consolidated financial statements as of and for the year ended December 31, 1994
have been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income........................ $72,870 $67,168 $61,192 $57,016 $46,432
Interest expense....................... 30,958 27,851 24,514 22,628 16,635
------ ------ ------ ------ ------
Net interest income.................... 41,912 39,317 36,678 34,388 29,797
Provision for loan losses.............. 2,732 2,829 1,740 1,405 1,232
----- ------ ------ ------ ------
Net interest income after provision
for loan losses...................... 39,180 36,488 34,938 32,983 28,565
Noninterest income..................... 6,381 5,733 5,165 4,405 3,923
Noninterest expense.................... 24,602 22,084 19,796 20,062 18,807
------ ------ ------ ------ ------
Income before income taxes............. 20,959 20,137 20,307 17,326 13,681
Income taxes........................... 7,354 7,295 7,232 6,223 4,579
----- ------ ------ ----- -----
Net income............................. 13,605 12,842 13,075 11,103 9,102
Preferred dividends.................... 1,506 1,513 1,522 1,523 1,523
----- ----- ----- ----- -----
Net income available to common......... $12,099 $11,329 $11,553 $9,580 $7,579
======= ======= ======= ====== ======
PER COMMON SHARE DATA:(1)
Net income per common share............ $1.22 $1.14 $1.16 $0.96 $0.76
Book value............................. $7.94 $6.94 $5.96 $5.02 $3.92
Tangible book value(2)................. $7.54 $6.46 $5.40 $4.37 $3.18
Cash dividends declared................ $0.26 $0.22 $0.20 $0.18 $0.09
Common dividend payout ratio........... 21.43% 19.28% 16.78% 18.16% 11.82%
Weighted average shares outstanding.... 9,915,921 9,926,678 9,939,197 9,944,559 9,949,800
Shares outstanding at end of period.... 9,915,600 9,928,500 9,927,700 9,940,200 9,946,200
BALANCE SHEET DATA:
Total assets........................... $976,185 $880,512 $802,266 $721,994 $672,807
Securities............................. 248,038 209,207 189,843 185,445 198,225
Loans.................................. 655,427 602,477 552,188 481,005 420,969
Allowance for loan losses.............. 9,570 8,145 7,129 6,183 5,303
Total deposits......................... 850,455 767,726 707,703 640,237 607,097
Borrowings............................. 13,862 12,066 5,814 1,739 1,739
Preferred equity....................... 17,858 17,927 18,052 18,075 18,086
Common equity.......................... 78,720 68,916 59,202 49,926 38,980
Total shareholders' equity............. 96,578 86,843 77,254 68,001 57,066
</TABLE>
18
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<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE BALANCE SHEET DATA:
Total assets........................... $918,408 $834,786 $763,789 $702,671 $628,624
Securities............................. 227,352 197,992 192,860 197,722 180,022
Loans.................................. 621,418 571,877 511,033 448,509 392,574
Allowance for loan losses.............. 8,910 7,370 6,634 5,692 4,869
Total deposits......................... 798,954 730,098 677,244 628,796 566,879
Borrowings............................. 13,635 10,585 2,856 1,999 3,124
Preferred equity....................... 17,883 17,980 18,073 18,082 18,095
Common equity.......................... 74,323 64,286 55,375 44,892 37,884
Total shareholders' equity............. 92,206 82,266 73,448 62,974 55,979
PERFORMANCE RATIOS:(3)
Return on average assets............... 1.48% 1.54% 1.71% 1.58% 1.45%
Return on average common equity........ 16.28% 17.62% 20.86% 21.34% 20.01%
Net interest margin (tax-equivalent)(4) 5.06% 5.21% 5.31% 5.40% 5.25%
Efficiency ratio(5).................... 48.31% 47.02% 45.47% 49.69% 53.30%
ASSET QUALITY RATIOS:(6)(7)
Excluding impact of government guarantees
on portion of loan portfolio:
Nonperforming loans to total loans. 0.93% 1.24% 1.06% 0.89% 0.81%
Nonperforming assets to total
loans and other real estate...... 1.24% 1.62% 1.38% 1.21% 1.04%
Net loan charge-offs to average loans 0.21% 0.32% 0.16% 0.12% 0.12%
Allowance for loan losses to
total loans...................... 1.46% 1.35% 1.29% 1.29% 1.26%
Allowance for loan losses to
nonperforming loans.............. 156.86% 108.95% 121.51% 143.76% 155.24%
Including impact of government guarantees
on portion of loan portfolio:(8)
Nonperforming loans, net of
government guaranteed portion,
to total loans................... 0.71% 1.00% 0.79% 0.76% 0.76%
Nonperforming assets, net of
government guaranteed
portion, to total loans and
other real estate................ 1.03% 1.38% 1.12% 1.07% 0.99%
Allowance for loan losses to
nonperforming loans, net of
government guaranteed portion.... 204.49% 134.67% 162.43% 169.86% 165.31%
CAPITAL RATIOS:(6)
Average common equity to
average total assets................. 8.09% 7.70% 7.25% 6.39% 6.02%
Leverage ratio......................... 9.58% 9.53% 9.05% 8.57% 7.65%
Tier 1 risk-based capital ratio........ 13.71% 13.58% 13.25% 12.76% 11.08%
Risk-based capital ratio............... 14.96% 14.81% 14.50% 14.01% 12.31%
Intangibles to tangible common equity.. 5.29% 7.48% 10.52% 14.90% 23.09%
</TABLE>
- -------------------
(1) All of the per share data in the table above has been adjusted to reflect
the [100]-for-one stock split effected June __, 1999.
(2) Calculated by dividing common shareholders' equity less intangible
property, by common shares outstanding at end of the applicable period.
(3) For purposes of computing performance ratios, all interim periods have been
annualized.
(4) Calculated using a 35% federal income tax rate.
(5) Calculated by dividing total noninterest expense less other real estate
expense by tax-equivalent net interest income plus noninterest income other
than securities gains and losses.
(6) Except for the ratio of net loan charge-offs to average loans and the ratio
of average common equity to average total assets, all asset quality ratios
and capital ratios have been stated as of the end of the applicable period.
(7) Nonperforming loans include nonaccrual loans, restructured loans and
accruing loans 90 days or more delinquent.
(8) 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 the Farm Service
Agency of the USDA.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We have a strong record of financial performance, with compounded annual growth
rates for the five-year period ended December 31, 1998 of 11.3% in total assets,
11.4% in total loans and 14.5% in net income available to common shareholders.
At December 31, 1998, our total assets were $976.2 million, an increase of
$405.5 million from $570.7 million at December 31, 1993. Our total loans at
December 31, 1998 were $655.4 million, an increase of $274.0 million from $381.4
million at December 31, 1993. Our net income available to common shareholders
for 1998 was $12.1 million, nearly twice the amount of our net income available
to common shareholders of $6.1 million for 1993.
We compare ourselves to a group of approximately 200 bank holding companies with
assets of between $500 million and $1 billion (our "Peer Group") based on
information published by the Federal Reserve Board in its Uniform Bank Holding
Company Performance Report. Our return on average assets of 1.48% in 1998 ranked
us in the top 20% of our Peer Group with respect to that index. Our
tax-equivalent net interest margin has exceeded 5.00% in each of the last five
years, and our margin of 5.06% for 1998 placed us in the top 25% of our Peer
Group with respect to that indicator. Our efficiency ratio has been below 50%
since 1995, and our efficiency ratio of 48.3% in 1998 ranked us in the top 10%
of our Peer Group with respect to that benchmark.
Our net income in 1998 increased to $13.6 million from $12.8 million in 1997,
representing an increase of 5.9%. Our earnings per common share in 1998
increased to $1.22 from $1.14 in 1997, representing an increase of 7.0%. The
increase in net income reflected higher net interest income and noninterest
income which more than offset increases in noninterest expense. The increase in
net interest income was driven by growth in interest-earning assets, including
strong loan growth, as well as solid growth in lower-cost core deposits. In
1998, our average cost of funds was 3.59%. At December 31, 1998, approximately
79.8% of our deposits were core deposits, which includes all of our deposits
other than certificates of deposit in amounts of $100,000 or more, and 15.1% of
our total deposits were noninterest-bearing demand deposits. Our return on
average assets was 1.48% in 1998 and 1.54% in 1997, and our return on average
common equity was 16.28% in 1998 and 17.62% in 1997.
Our total assets at December 31,1998 were $976.2 million, compared to $880.5
million at December 31, 1997, representing an increase of 10.9%. Our loan
portfolio grew by $52.9 million or 8.8% in 1998, with $35.8 million of this
growth representing commercial and agricultural portfolio growth and the
remaining $17.1 million representing consumer and residential real estate loan
growth. Deposits increased by $82.7 million, or 10.8%, to $850.4 million at
December 31, 1998 from $767.7 million at December 31, 1997. Total shareholders'
equity increased $9.7 million, or 11.2%, to end 1998 at $96.6 million.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning assets, including loans and securities, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowings. Interest rate fluctuations and changes in the amount and type of
earning assets and liabilities affect net interest income. One of the primary
indicators that we use to measure our performance in the area of net interest
income is net interest margin. Net interest margin represents the difference
between the yield on our total interest-earning assets and the cost of our funds
divided by interest-earning assets.
1998 versus 1997. Net interest income, the principal source of our earnings, was
$41.9 million in 1998 compared with $39.3 million in 1997, an increase of $2.6
million or 6.6%. Net interest margin, on a tax-equivalent basis, was 5.06% for
1998 and 5.21% for 1997. Net interest income increased as a result of a 10.2%
increase in average earning assets, derived primarily from growth in loans and
securities, which was partially offset by a 15 basis point decline in the net
interest margin. Average earning assets grew by $80.6 million in 1998, with
average loans growing by $49.5 million, or 8.7%, and average investment
securities growing by $29.4 million, or 14.8%. Our
20
<PAGE>
average core deposits, which are total deposits excluding time deposits over
$100,000, increased by 7.4% or $44.3 million in 1998 to $640.6 million. Our
average wholesale funds, comprised of time deposits over $100,000 and borrowed
funds, increased in 1998 by $27.6 million, or 19.1%, to $172.0 million.
Our net interest margin declined by 15 basis points in 1998 as a result of a
declining interest rate environment, a relatively flat yield curve and intense
competitive pressures. The yield on interest-earning assets decreased to 8.65%
in 1998 from 8.76% in 1997, while the cost of interest-bearing liabilities
increased to 4.41% in 1998 from 4.33% in 1997.
Due to an increased volume of average earning assets which more than offsets the
decrease in net interest margin, our tax-equivalent net interest income in 1998
increased by $2.9 million, or 7.2%, from our net interest income in 1997.
1997 versus 1996. Our net interest income in 1997 increased to $39.3 million
from $36.7 million in 1996, representing an increase of $2.6 million, or 7.2%.
This increase was due to average interest-earning assets increasing by $65.3
million, or 9.1%, primarily through loan growth. The increase was, however,
partially offset by an increase in average interest-bearing liabilities of $53.5
million, or 9.1%, during 1997 and the cost of such liabilities increasing 17
basis points while our interest-earning assets yield increased only four basis
points. As a result, our net interest margin, on a tax equivalent basis,
declined to 5.31% in 1997 from 5.21% in 1996.
The following table presents, for the years indicated, the total dollar amount
of average balances, the interest income from average interest-earning assets
and the resulting yields and the interest expense on average interest-bearing
liabilities expressed both in dollars and rates. Except as indicated in the
footnotes to this table, no tax-equivalent adjustments have been made and all
average balances are daily average balances.
Nonaccruing loans have been included in the yield calculations in this table.
21
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and interest-
bearing deposits............ $15,406 $842 5.47% $14,204 $788 5.55% $14,875 $813 5.47%
Investment securities(1)....... 227,352 14,784 6.50 197,992 13,149 6.64 192,860 12,529 6.50
Loans(2):
Commercial and agricultural. 324,039 30,807 9.51 297,262 28,510 9.59 257,176 25,116 9.77
Residential real estate..... 174,785 16,211 9.27 161,976 15,007 9.26 150,047 13,816 9.21
Consumer and home equity.... 122,594 12,072 9.85 112,639 11,213 9.95 103,809 10,383 10.00
------- ------ ---- ------- ------ ---- ------- ------ -----
Total loans............... 621,418 59,090 9.51 571,877 54,730 9.57 511,032 49,315 9.65
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning . 864,176 74,716 8.65 784,073 68,667 8.76 718,767 62,657 8.72
assets ------- ------ ---- ------- ------ ---- ------- ------ ----
Interest-bearing liabilities:
NOW interest-bearing
checking ................ 91,627 1,335 1.46 83,271 1,211 1.45 79,976 1,236 1.55
Savings and money market.... 163,966 4,301 2.62 166,646 4,447 2.67 179,678 4,834 2.69
Certificates of deposit..... 433,067 24,523 5.66 382,670 21,534 5.63 327,180 18,222 5.57
Borrowed funds.............. 13,635 799 5.86 10,585 658 6.22 2,856 222 7.77
------ ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities 702,295 30,958 4.41 643,172 27,850 4.33 589,690 24,514 4.16
------- ------ ---- ------- ------ ---- ------- ------ ----
Net interest income............ $43,758 $40,817 $38,143
====== ====== ======
Net interest rate spread....... 4.24% 4.43% 4.56%
===== ===== =====
Net earning assets............. $161,881 $140,901 $129,077
======= ======= =======
Net interest margin on earning
assets(3)................... 5.06% 5.21% 5.31%
===== ===== =====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 123.05% 121.91% 121.89%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------- ---- ---- ------- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and interest
bearing deposits............ $15,078 $923 6.12% $15,818 $809 5.11%
Investment securities(1)....... 197,722 12,614 6.38 180,022 10,570 5.87
Loans(2):
Commercial and agricultural. 220,762 22,677 10.27 190,842 17,380 9.11
Residential real estate..... 131,611 12,228 9.29 115,449 10,123 8.77
Consumer and home equity.... 96,136 9,922 10.32 86,283 8,629 10.00
------ ----- ----- ------ ----- -----
Total loans............... 448,509 44,827 9.99 392,574 36,132 9.20
------- ------ ---- ------- ------ ----
Total interest-earning . 661,309 58,364 8.83 588,414 47,511 8.07
assets ------- ------ ---- ------- ------ ----
Interest-bearing liabilities:
NOW interest-bearing
checking ................. 76,272 1,395 1.83 76,502 1,482 1.94
Savings and money market.... 189,341 5,445 2.88 212,454 5,858 2.76
Certificates of deposit..... 281,326 15,603 5.55 203,064 9,053 4.46
Borrowed funds.............. 1,998 185 9.26 3,124 242 7.75
------- ------ ----- ------ --- ----
Total interest-bearing
liabilities 548,937 22,628 4.12 495,144 16,635 3.36
------- ------ ---- ------- ------ ----
Net interest income............ $35,736 $30,876
====== ======
Net interest rate spread....... 4.71% 4.71%
===== =====
Net earning assets............. $112,372 $93,270
======= ======
Net interest margin on earning
assets(3)................... 5.40% 5.25%
===== =====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 120.47% 118.84%
======= =======
</TABLE>
- -------------------
(1) Amounts shown are amortized cost. In order to make pre-tax income and
resultant yields on tax-exempt securities comparable to those on taxable
securities and loans, a tax-equivalent adjustment to interest earned from
tax-exempt securities has been computed using a federal income tax rate of
35%.
(2) Net of deferred loan fees and expenses and loan discounts.
(3) The net interest margin is equal to net interest income divided by average
interest-earning assets.
22
<PAGE>
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 our interest income and interest expense during the
years indicated. Information is provided in each category with respect to: (1)
changes attributable to changes in volume (changes in volume multiplied by the
prior rate); (2) changes attributable to changes in rate (changes in rate
multiplied by the prior volume); and (3) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
----------------------------- ----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO TOTAL DUE TO TOTAL
------------------ INCREASE ------------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------ ---- -------- ------ ---- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
interest bearing deposits................... $64 $(10) $54 $(54) $29 $(25)
Investment securities......................... 1,984 (349) 1,635 363 257 620
Loans:
Commercial.................................. 826 (34) 792 1,195 (180) 1,015
Commercial real estate...................... 16 (52) (36) 910 (67) 843
Agricultural................................ 1,673 (132) 1,541 1,727 (191) 1,536
Residential real estate..................... 1,188 16 1,204 1,104 87 1,191
Consumer and home equity.................... 1,017 (158) 859 934 (104) 830
----- ----- --- --- ----- ----
Total loans............................... 4,720 (360) 4,360 5,870 (455) 5,415
----- ----- ----- ----- ----- -----
Total interest-earning assets............. 6,768 (719) 6,049 6,179 (169) 6,010
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Interest-bearing checking deposits............ 134 (10) 124 54 (79) (25)
Savings and money market deposits............. (72) (74) (146) (351) (36) (387)
Certificates of deposit....................... 2,855 134 2,989 3,136 176 3,312
Borrowed funds................................ 164 (23) 141 432 4 436
--- ---- --- --- --- ----
Total interest-bearing liabilities.......... 3,081 27 3,108 3,271 65 3,336
----- --- ----- ----- --- -----
Net interest income............................. $3,687 $(746) $2,941 $2,908 $(234) $2,674
===== ===== ===== ===== ==== =====
</TABLE>
Provision for Loan Losses
We establish provisions for loan losses, which are charged to operations, to
reflect our allowance for loan losses at a level deemed appropriate by
management based on the factors discussed under "--Financial
Condition--Allowance for Loan Losses."
1998 versus 1997. The provision for loan losses decreased $97,000, or 3.4%, to
$2.7 million in 1998, from $2.8 million in 1997. Actual loan charge-offs, net of
recoveries, were $1.3 million in 1998 as compared to $1.8 million in 1997.
Charge-offs in 1997 reflect an unusual charge of $460,000 relating to a
borrower's fraudulent credit actions. The 1998 provision reflects our decision
to strengthen our allowance for loan losses to total loans to 1.46% in 1998 from
1.35% in 1997 and an increase in our allowance for loan losses to nonperforming
loans net of government guarantees to 204.49% in 1998 from 134.67% in 1997.
1997 versus 1996. During 1997, we made provisions totaling $2.8 million to the
allowance for loan losses, an increase of $1.1 million compared to $1.7 million
in 1996. As discussed above, the provision for loan losses and recorded loan
charge-offs in 1997 were inflated by a $460,000 charge related to a borrower's
fraudulent credit actions. Loan charge-offs, net of recoveries, were $1.8
million in 1997 versus $794,000 in 1996.
23
<PAGE>
Noninterest Income
The following table presents the major categories of noninterest income during
the years indicated:
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Service charges on deposit accounts..... $3,234 $2,706 $2,684
Loan servicing fees..................... 1,190 1,137 925
Mutual fund income...................... 672 471 404
Insurance income........................ 238 175 138
Gain on sale of assets.................. 181 353 253
Other................................... 866 891 761
------ ------ ------
Total noninterest income.............. $6,381 $5,733 $5,165
====== ====== ======
1998 versus 1997. Noninterest income increased to $6.4 million in 1998 from $5.7
million in 1997, representing an increase of 11.3%. Service charges on deposit
accounts increased $528,000, or 19.5%, to $3.2 million in 1998 from $2.7 million
in 1997. This increase resulted from an increase in demand deposit customers,
selected increases in deposit service pricing and reductions in deposit service
charge waivers. Loan servicing fees increased $53,000, or 4.7%, from $1.1
million in 1997 to $1.2 million in 1998 consistent with the increase in our
portfolio of loans serviced for others. Mutual fund income increased $201,000,
or 42.7%, from $471,000 in 1997 to $672,000 in 1998 due to a greater emphasis on
the sale of such investment products. A decrease of $171,000 in gains on the
sale of assets, principally loans, from $353,000 in 1997 to $181,000 in 1998,
partially offset the increase in other categories of noninterest income.
1997 versus 1996. Noninterest income increased to $5.7 million in 1997 from $5.2
million in 1996, representing an increase of 11.0%. Loan servicing fees
increased $212,000, or 22.9%, to $1.1 million in 1997 from $925,000 in 1996 as a
result of the increase in our portfolio of loans serviced for others. Gain on
sale of assets, principally loans, increased $100,000 to $353,000 in 1997.
Mutual fund income increased $67,000 to $471,000 in 1997.
Noninterest Expense
The following table presents the major categories of noninterest expense for the
periods indicated:
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Salaries and employee benefits......... $13,092 $11,713 $10,740
Occupancy and equipment................ 3,855 3,809 2,987
Supplies and postage................... 1,363 1,211 1,187
Amortization of intangibles............ 839 839 839
Professional fees...................... 809 328 273
Advertising............................ 487 476 422
Other real estate...................... 378 198 103
Other expense.......................... 3,779 3,510 3,245
----- ----- -----
Total noninterest expense............ $24,602 $22,084 $19,796
====== ====== ======
1998 versus 1997. Noninterest expenses increased to $24.6 million in 1998 from
$22.1 million in 1997, representing an increase of 11.4%. This increase
primarily reflects an investment in our future with additions to staff and
upgrades to facilities and technology. Key members were added to our management
team and several branch facilities were expanded and one new branch was opened.
We also added features to our technological capabilities including an internet
banking product, check imaging and upgrades to our overall data processing
capabilities in preparation for the year 2000. Even with these expenditures, our
efficiency ratio, which measures the amount of overhead required to produce a
dollar of revenue, remained at a relatively low level. For the year ended
December 31, 1998 our efficiency ratio was 48.3%, compared to 47.0% in 1997.
24
<PAGE>
Salaries and employee benefits increased to $13.1 million in 1998 from $11.7
million in 1997, representing an increase of 11.8%. Upgrades to our salary and
incentive compensation programs, additions to our management team and additional
staff hired at a new branch account for the increase. Occupancy and equipment
costs increased only $46,000, or 1.2%, as additional non-recurring costs
associated with opening our new corporate headquarters and operations center in
1997 were replaced with costs associated with upgrading branch facilities and
acquiring new technology in 1998. Legal and professional fees increased $481,000
in 1998 principally as a result of consulting fees incurred in connection with a
"Best Practice and Income Enhancement" project which should assist us in
improving efficiencies and fee income in the future.
1997 versus 1996. Noninterest expense increased to $22.1 million in 1997 from
$19.8 million in 1996, representing an increase of 11.6%. This increase can be
partially attributed to staff increases from the opening of three new branches
and additional lending personnel. Salaries and benefits increased to $11.7
million in 1997 from $10.7 million in 1996, representing an increase of 9.1%.
Occupancy and equipment expense increased to $3.8 million in 1997 from $3.0
million in 1996, representing an increase of 27.5%. These costs were associated
with upgrading the facilities at several of our branch locations, opening the
three new branches and opening our new corporate headquarters and operations
facility.
Income Taxes
Income tax expense increased to $7.4 million in 1998 from $7.3 million in 1997,
representing an increase of 0.8%. Income tax expense was $7.3 million in 1997,
compared to $7.2 million in 1996. The effective tax rate was 35.1% in 1998,
compared to 36.2% in 1997 and 35.6% in 1996. The fluctuation in the effective
tax rate from year to year is attributable to changes in the percentage of our
pre-tax income being derived from interest income on tax-exempt securities.
FINANCIAL CONDITION
Loan Portfolio
Our total loans increased to $655.8 million at December 31, 1998 from $602.9
million at December 31, 1997, representing an increase of $52.9 million or 8.8%.
In 1998, our commercial loans increased $11.9 million or 11.3%, while commercial
real estate loans increased by $7.7 million or 7.7%. These increases demonstrate
our ability to attract new commercial lending business in a slow-growth
environment as a result of effective business development and the
dissatisfaction of customers of larger regional banks. All of our banks are
active small business lenders and are directly involved in economic development
programs in their markets. At December 31,1998, commercial loans totaled $117.8
million, representing 17.9% of total loans, and commercial real estate loans
totaled $106.9 million, representing 16.3% of total loans.
We have developed one of the strongest agribusiness lending programs in New York
State over the last decade. Wyoming County Bank was recognized as the largest
Farm Service Agency guaranteed lender in New York State as of October 1, 1998.
The National Bank of Geneva and The Pavilion State Bank also have very active
agribusiness lending programs. Agricultural loans, which include agricultural
real estate loans, represent 18.9% of our total loan portfolio. Between December
31, 1997 and December 31, 1998, agricultural loans increased by $16.2 million,
or 15.1%, to $123.7 million.
Residential mortgage lending is our largest lending product by dollar volume. As
of December 31, 1998, our residential loan portfolio had grown by $11.4 million
or 6.7% from December 31, 1997, and totaled $182.2 million or 27.8% of the total
loan portfolio. We were able to successfully compete for this business during
the heavy refinancing period of the last few years through aggressive business
development efforts and by providing a broad line of variable and fixed-rate
mortgage products.
We also offer a broad range of consumer loan products. Consumer and home equity
loans grew by $5.7 million, or 4.8%, in 1998 and ended the year at $125.2
million, representing 19.1% of the total loan portfolio.
25
<PAGE>
The following table summarizes, as of the dates indicated, our loan portfolio by
type of loan:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ---------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial............. $117,750 17.9% $105,811 17.6% $100,854 18.2% $82,538 17.1% $72,968 17.3%
Commercial real estate. 106,948 16.3 99,273 16.5 98,118 17.8 85,774 17.8 76,142 18.1
Agricultural........... 123,754 18.9 107,546 17.8 86,674 15.7 69,223 14.4 57,810 13.7
Residential real estate 182,177 27.8 170,736 28.3 157,490 28.5 144,407 30.0 122,880 29.2
Consumer and home equity 125,198 19.1 119,506 19.8 109,456 19.8 99,515 20.7 91,600 21.7
------- ---- ------- ---- ------- ---- ------ ---- ----- ----
Total loans, gross. $655,827 100.0% $602,872 100.0% $552,592 100.0% $481,457 100.0% $421,400 100.0%
===== ===== ===== ===== =====
Net deferred fees...... (400) (395) (403) (452) (431)
Allowance for loan losses (9,570) (8,145) (7,129) (6,183) (5,303)
----- ----- ----- ----- -----
Total loans, net... $645,857 $594,332 $545,060 $474,822 $415,666
======= ======= ======= ======= =======
</TABLE>
Loan Policy. Our loan policy establishes the general parameters of the
types of loans that are desirable, emphasizing cash flow and collateral
coverage. Under our 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 our
overall loan policy. Revisions to these bank subsidiary policies are reviewed by
us 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 $300,000. Generally we have a policy of
limiting our exposure to any one borrower to $4 million in order to limit our
credit risk, although the aggregate legal lending limit for our banks on a
combined basis is $13.1 million. We presently have only five loans in excess of
$4 million and none of our loans exceeds $7.9 million.
Commercial Loans. We originate commercial loans in our primary market area
and underwrite them based on the borrower's ability to service the loan from
operating income. We offer 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. The purpose of a loan generally determines its structure. As a
general practice, we take a collateral lien on any available real estate,
equipment or other assets owned by the borrower and obtain a personal guarantee
of the borrower. Working capital loans are generally collateralized by
short-term assets, whereas term loans are primarily collateralized by long-term
assets. We also utilize government loan guarantee programs offered by the Small
Business Administration (or "SBA") when appropriate. See "--Government Guarantee
Programs" below.
Commercial Real Estate Loans. In addition to commercial loans secured by
real estate, we make commercial real estate loans to finance the purchase of
real property which generally consists of real estate with completed structures.
Our 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 15 year
period. Payments on loans secured by such properties are often dependent on the
successful operation or management of the properties. Accordingly, repayment of
these loans may be subject to adverse conditions in the real estate market or
the economy to a greater extent than other types of loans. We seek to minimize
these risks in a variety of ways when we underwrite these loans, including by
giving careful consideration to the property's operating history, future
operating projections, current and projected occupancy, location and physical
condition. The underwriting analysis also includes credit verification,
appraisals and a review of the borrower's financial condition.
Agricultural Loans. We provide agricultural loans for short-term crop
production, farm equipment 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 cattle), business expansion (including acquisition of real estate, expansion
and improvement) and the purchase of equipment. We evaluate
26
<PAGE>
agricultural borrowers primarily based on their historical profitability, level
of experience in their particular agricultural industry, overall financial
capacity and the availability of secondary collateral to withstand economic and
natural variations common to the industry. Because agricultural loans present a
higher level of risk associated with events caused by nature, we routinely make
on-site visits and inspections in order to monitor and identify such risks. Our
experience in over a century of agricultural lending in Western and Central New
York has produced a substantial experience base on which to draw in evaluating
and underwriting agricultural loans. We 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. We originate fixed and variable rate
one-to-four family residential real estate loans collateralized by
owner-occupied properties located in our market area. We offer a variety of real
estate loan products which generally are amortized over five to 30 years. 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. We normally require mortgage title insurance and hazard insurance. We
sell most of our fixed rate one-to-four family residential mortgages to the
Federal Home Loan Mortgage Corporation ("Freddie Mac") and retain the rights to
service the mortgages. At December 31, 1998, we serviced $140.7 million in
residential mortgages, all of which have been sold to Freddie Mac.
Consumer and Home Equity Loans. We make direct and indirect "A-" 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.
We also issue Visa Cards that provide consumer credit lines. 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 snowmobile as collateral. We use
credit scoring to efficiently administer the underwriting of this portfolio.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan balance. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws may
limit the amount which can be recovered on such loans.
Government Guarantee Programs. We participate in government loan guarantee
programs offered by the SBA and FSA. At December 31, 1998, we had loans with an
aggregate principal balance of $28.8 million that were covered by guarantees
under these programs. The guarantees only cover a certain percentage of these
loans. By participating in these programs, we are able to broaden our base of
borrowers while minimizing credit risk.
The SBA administers 14 separate loan programs designed to facilitate lending to
small and minority-owned businesses. The most popular program is the 7(A) Loan
Guaranty Program, which typically covers loans of up to $1 million. The maximum
SBA guaranty is 75% of the principal amount of the loan, and the maximum amount
that the SBA can guarantee for a single loan is generally $750,000. For loans of
$100,000 or less, the SBA can guarantee up to 80% of the principal amount.
Eligibility for SBA-guaranteed loans is generally determined by the borrower's
size (measured by annual sales or number of employees, in certain cases) and
type of business. The proceeds of SBA-guaranteed loans can be used for most
business purposes, including construction, renovation, purchase of equipment or
inventory, and working capital. There are also a number of small-loan programs,
such as the Specialized 7(a) SBA Low Doc Program, for loans under $150,000. Loan
maturities range from seven years for working capital and equipment loans to 25
years for real estate loans. Interest rates are established by the originating
lender, but are subject to SBA maximums, which are pegged to the prime rate.
Wyoming County Bank is certified as a "Preferred Lender" under the SBA's PLP
Program, which allows it to make guaranteed 7(A) loans without prior SBA
approval.
We also participate in the Certified Lenders Program sponsored by the FSA. The
FSA offers direct and guaranteed farm ownership and operating loans to farmers
who are temporarily unable to obtain private, commercial credit.
27
<PAGE>
Under the guaranteed loan program, the FSA guarantees loans made by conventional
agricultural lenders for up to 90% of principal (up to 95% in very limited
circumstances). The lender is responsible for servicing the loan. All loans must
meet certain qualifying criteria to be eligible for guarantees, and the FSA has
the right and responsibility to monitor the lender's servicing activities.
Farmers interested in guaranteed loans apply to a conventional lender, who then
arranges for the FSA guarantee. Applicants unable to qualify for a guaranteed
loan may be eligible for a direct loan from the FSA. Farm Ownership Loans may be
used to purchase farmland, construct or repair buildings, develop farmland to
promote soil or water conservation or to refinance debt. Operating Loans may be
used to purchase livestock, farm equipment, feed, seed, fuel, insurance and to
refinance other obligations under certain conditions. The FSA can guarantee both
of these types of loans in principal amounts of up to $700,000. Operating Loans
normally have a seven-year term and Farm Ownership Loans can have terms up of to
40 years. Interest rates cannot exceed the rate charged by the lender to its
average farm borrower. Wyoming County Bank has been designated as a "Preferred
Certified Lender" by the FSA which generally provides for expedited approval of
loans, greater flexibility to use the lender's own forms and a five-year line of
credit.
Loan Maturities. The following table sets forth contractual maturity ranges
of the loan portfolio by loan type as of December 31, 1998. 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..................... $56,583 $37,191 $23,976 $117,750
Commercial real estate......... 4,716 15,418 86,814 106,948
Agricultural................... 29,268 28,533 65,953 123,754
Residential real estate........ 4,210 11,527 166,440 182,177
Consumer and home equity....... 6,572 66,104 52,522 125,198
----- ------ ------ -------
Total........................ $101,349 $158,773 $395,705 $655,827
======= ======= ======= =======
Delinquencies and Nonperforming Assets
We have several procedures in place to assist in maintaining the overall quality
of our loan portfolio. We have established specific underwriting guidelines to
be followed by our lending officers. We also monitor each bank subsidiary's
delinquency levels on a monthly basis for any adverse trends. There can be no
assurance, however, that our loan portfolio will not become subject to
increasing pressures from deteriorating borrower credit due to general economic
conditions.
Every commercial and agribusiness borrower is given a credit grade by the
originating officer which is then confirmed or modified by the subsidiary bank's
loan committee. These credit grades are maintained and adjusted upon the review
of the borrower's situation either when a new borrowing request is considered,
or during the annual review of updated financial information.
The National Bank of Geneva has an internal loan review department which
performs a formal loan review of that bank's loan portfolio on an ongoing basis.
The scope of that review is approved by that bank's Board of Directors. Our
other three banks contract with an outside firm to conduct a formal loan review
annually on an outsourced basis. The National Bank of Geneva also conducts an
outsourced loan review every two or three years. The scope of each of the
reviews is approved by the applicable bank's Boards of Directors. The results of
all loan reviews are presented in detail to each subsidiary bank's Board of
Directors as well as to our Chief Executive Officer.
Through the loan review process, we maintain an internally classified loan list
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
28
<PAGE>
require a charge-off if liquidated at present. Loans classified as "loss" are
those loans which are in the process of being charged-off.
In addition to the internally classified loan list and delinquency list of
loans, we maintain a separate "watch list" which further assists in monitoring
our loan portfolio. Watch list loans have one or more deficiencies that require
attention in the short-term or in a pertinent ratio of the loan agreement that
have weakened to a point where more frequent monitoring is warranted. These
loans do not have all of the characteristics of a classified loan (substandard
or doubtful) but do show weakened elements compared with those of a satisfactory
credit. We review these loans to assist in assessing the adequacy of the
allowance for loan losses.
We require appraisals on loans secured by real estate as well as valuations of
equipment. With respect to potential problem loans, an evaluation of the
borrower's overall financial condition is made to determine the need, if any,
for possible writedowns or appropriate additions to the allowance for loan
losses.
We generally place a loan on nonaccrual status and cease 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.
As of December 31, 1998, we had $8.2 million in nonperforming assets, of which
$1.4 million were government guaranteed, resulting in total nonperforming
assets, net of government guarantees, of $6.8 million or 1.03% of total loans
and other real estate. This reflects an improving trend from December 31, 1997
when $9.8 million in assets were nonperforming, of which $1.4 million were
government guaranteed, resulting in nonperforming assets net of guarantees of
$8.4 million, or 1.38% of total loans and other real estate. This improvment is
a result of successful efforts to liquidate collateral securing several
nonperforming loans, improved milk pricing for our agribusiness nonperforming
loans, tightening underwriting standards in response to general economic
conditions as well as intensified collection efforts overall.
29
<PAGE>
The following table presents information regarding nonperforming assets at
December 31, 1998, 1997, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans(1):
Commercial......................................... $1,250 $970 $1,048 $1,025 $1,360
Commercial real estate............................. 995 1,648 1,877 1,550 856
Agricultural....................................... 2,340 2,669 1,218 579 30
Residential real estate............................ 733 1,325 679 357 332
Consumer and home equity........................... 423 431 517 402 332
--- ----- ---- ---- ----
Total loans...................................... 5,741 7,043 5,339 3,913 2,910
Accruing loans 90 days or more delinquent............ 360 433 528 388 506
------ ---- ----- ---- ----
Total nonperforming loans........................ 6,101 7,476 5,867 4,301 3,416
Other real estate owned(2)........................... 2,084 2,309 1,801 1,541 989
----- ----- ----- ----- ----
Total nonperforming assets..................... 8,185 9,785 7,668 5,842 4,405
Less: government guaranteed portion
of nonperforming loans............................. 1,421 1,428 1,478 661 208
----- ----- ----- ---- ----
Total nonperforming assets, net of
government guaranteed portion...................... $6,764 $8,357 $6,190 $5,181 $4,197
===== ===== ===== ===== =====
Nonperforming loans to total loans................... 0.93% 1.24% 1.06% 0.89% 0.81%
===== ===== ===== ===== =====
Nonperforming loans, net of government
guaranteed portion, to total loans(3).............. 0.71% 1.00% 0.79% 0.76% 0.76%
===== ===== ===== ===== =====
Nonperforming assets to total loans
and other real estate.............................. 1.24% 1.62% 1.38% 1.21% 1.04%
===== ===== ===== ===== =====
Nonperforming assets, net of government
guaranteed portion, to total loans and
other real estate.................................. 1.03% 1.38% 1.12% 1.07% 0.99%
===== ===== ===== ===== =====
</TABLE>
(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
collectability 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 principal balance of loan delinquencies in
our loan portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- --------------- -------------- -------------
60-89 90 DAYS 60-89 90 DAYS 60-89 90 DAYS 60-89 90 DAYS 60-89 90 DAYS
DAYS OR MORE DAYS OR MORE DAYS OR MORE DAYS OR MORE DAYS OR MORE
---- ------- ---- ------- ---- ------- ---- ------- ---- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial................... $350 $1,407 $ 24 $1,054 $ 150 $1,130 $ 20 $1,251 $ 241 $1,369
Commercial real estate....... 214 995 24 1,648 364 1,877 -- 1,550 263 898
Agricultural................. 40 2,340 -- 2,669 -- 1,220 8 579 2 43
Residential real estate...... 638 833 387 1,505 387 976 379 427 61 599
Consumer and home equity..... 351 526 372 600 248 664 362 494 233 507
---- ---- ----- ----- ---- ---- ---- ---- ---- ---
Total................... $1,593 $6,101 $807 $7,476 $1,149 $5,867 $769 $4,301 $ 800 $3,416
===== ===== === ===== ===== ===== === ===== ==== =====
Delinquent loans to total
loans 0.24% 0.93% 0.13% 1.24% 0.21% 1.06% 0.16% 0.89% 0.19% 0.81%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
30
<PAGE>
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 our estimate of the
amount of reasonably foreseeable losses, based on the following factors:
* the economic conditions in the region in which we do business;
* the credit conditions of our loan customers, as well as the underlying
collateral;
* the amount of historical charge-off experience; and
* the evaluation of the loan portfolio by the loan review function.
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 FII'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, we consider
the risk classification and delinquency status of loans and other factors, such
as collateral value, government guarantees, portfolio composition, trends in
economic conditions and the financial strength of borrowers. We establish
specific allowances for loans which we believe require reserves greater than
those allocated according to their classification or delinquency status. An
allowance is also established for each loan type based upon our rolling average
of historical charge-off experience taking into account levels and trends in
delinquencies, loan volumes, economic and industry trends and concentrations of
credit. We then charge to operations a provision for loan losses to maintain the
allowance for loan losses at an adequate level determined by the foregoing
methodology.
Actual charge-offs, net of recoveries, totaled $1.3 million or 0.21% of average
loans outstanding in 1998, compared to net charge-offs of $1.8 million or 0.32%
of average loans outstanding in 1997. Loan charge-offs in 1997 include $460,000
representing an unusual charge caused by a borrower's fraudulent credit actions.
Net charge-offs for 1997 excluding this event were $1.4 million, or 0.24% of
average loans outstanding. Net charge-offs were $794,000 or 0.16% of average
loans outstanding in 1996.
31
<PAGE>
The following table presents an analysis of the allowance for loan losses and
other related data for the periods indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of the year................. $8,145 $7,129 $6,183 $5,303 $4,528
Charge-offs:
Commercial......................................... 263 500 154 119 110
Commercial real estate............................. 687 746 237 165 52
Agricultural....................................... 19 -- 74 -- --
Residential real estate............................ 215 131 146 38 64
Consumer and home equity........................... 488 620 321 310 391
--- ---- ---- ---- ----
Total charge-offs................................ 1,672 1,997 932 632 617
----- ----- ---- ---- ----
Recoveries:
Commercial loans................................... 106 12 3 7 51
Commercial mortgage loans.......................... 84 18 35 10 1
Agricultural and agricultural mortgage loans....... -- 1 -- -- --
Residential mortgage loans......................... 42 26 2 1 9
Consumer and home equity loans..................... 133 127 98 89 99
---- ---- ---- --- ---
Total recoveries................................. 365 184 138 107 160
---- ---- ---- --- ---
Net charge-offs...................................... 1,307 1,813 794 525 457
Provision for loan losses............................ 2,732 2,829 1,740 1,405 1,232
----- ----- ----- ----- ------
Balance at the end of the year....................... $9,570 $8,145 $7,129 $6,183 $5,303
===== ===== ===== ===== =====
Ratio of net charge-offs to average loans............ 0.21% 0.32% 0.16% 0.12% 0.12%
==== ==== ==== ==== ====
Allowance for loan losses to total loans............. 1.46% 1.35% 1.29% 1.29% 1.26%
==== ==== ==== ==== ====
Allowance for loan losses to nonperforming loans..... 156.86% 108.95% 121.51% 143.76% 155.24%
====== ====== ====== ====== ======
Allowance of loan losses to nonperforming loans,
net of government guaranteed portion(1)............ 204.49% 134.67% 162.43% 169.86% 165.31%
====== ====== ====== ====== ======
</TABLE>
- -------------------
(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.
The allowance for loan losses to total loans that are not covered by government
guarantees was 1.53% at December 31, 1998.
The following table describes the allocation of the allowance for loan losses
among various categories of loans and certain other information for the dates
indicated. The allocation is made for analytical purposes and is not necessarily
indicative of the categories in which future losses may occur. The total
allowance is available to absorb losses from any segment of the loan portfolio.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ----------------- ------------------ ------------------ -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
ALLOWANCE OF TOTAL ALLOWANCE OF TOTAL ALLOWANCE OF TOTAL ALLOWANCE OF TOTAL ALLOWANCE OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial................. $3,227 17.9% $2,406 17.6% $1,573 18.2% $1,283 17.1% $1,641 17.3%
Commercial real estate..... 1,734 16.3 1,237 16.5 1,081 17.8 767 17.8 715 18.1
Agricultural............... 1,288 18.9 1,377 17.8 928 15.7 357 14.4 223 13.7
Residential real estate.... 1,489 27.8 1,328 28.3 965 28.5 427 30.0 294 29.2
Consumer and home equity... 1,643 19.1 1,490 19.8 1,555 19.8 726 20.7 617 21.7
Unallocated................ 189 -- 307 -- 1,027 -- 2,623 -- 1,813 --
----- ---- ----- ----- ----- ----- ----- ----- ----- -----
Total allowance for loan
losses $9,570 100.0% $8,145 100.0% $7,129 100.0% $6,183 100.0% $5,303 100.0%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
Where we are able to identify specific loans or categories of loans where
specific amounts of reserves are required, allocations are assigned to those
categories. We also maintain a reserve that is sufficient to absorb an estimated
32
<PAGE>
amount of unidentified potential losses based on management's perception of
economic conditions, loan portfolio growth, historical charge-off experience and
exposure concentrations. Our historic charge-off rate has been comparatively
low, reflecting conservative underwriting, the use of government guarantees, a
predictable economic environment and aggressive collection efforts. However, we
are aware that our regional and state economies have demonstrated increasing
instability which could contribute to job losses and otherwise adversely affect
a broad variety of business sectors. We believe that the diversified nature of
our loan portfolio properly spreads this risk.
Securities Activities
Our investment securities policy is contained within our 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, we consider
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 our 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.
Our 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:
* U.S. Treasury securities;
* U.S. government agency securities;
* pass-through mortgage-backed securities and collateralized mortgage
obligations issued by the Federal National Mortgage Association (FNMA),
the Government National Mortgage Association (GNMA) and Freddie Mac;
* investment grade municipal securities, including tax, revenue and bond
anticipation notes and general obligation and revenue notes and bonds;
* certain creditworthy un-rated securities issued by municipalities; and
* investment grade corporate debt.
Amortized Cost and Fair Value of Securities. As of December 31, 1998, the
carrying value of our securities portfolio was $248.0 million. Statement of
Financial Accounting Standards (SFAS) No. 115 requires that securities be
designated as either held to maturity or available for sale or trading,
depending on our intent regarding the particular security. We do not have a
trading portfolio. The following table sets forth certain information regarding
the amortized cost and fair values of our securities portfolio as of the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury and agency...............$ 12,476 $ 12,604 $ 42,081 $ 42,122 $ 48,088 $ 47,844
States and municipal obligations....... 78,540 79,824 57,003 57,781 58,024 58,947
------ -------- -------- -------- -------- --------
Total securities held to maturity.... 91,016 92,428 99,084 99,903 106,112 106,791
------ -------- -------- -------- ------- -------
Debt securities available for sale:
U.S. Treasury and agency............... 117,035 117,662 84,617 84,916 62,251 62,077
Mortgage backed securities............. 23,357 23,464 17,212 17,311 15,977 15,886
States and municipal obligations....... 9,028 9,209 4,321 4,362 2,668 2,687
Corporate bonds........................ 2,745 2,796 -- -- -- --
----- ----- ----- ----- ----- ------
Total debt securities available
for sale 152,165 153,131 106,150 106,589 80,896 80,650
------- ------- ------- ------- ------ ------
Equity securities available for sale..... 2,925 3,891 2,704 3,534 2,510 3,081
----- ----- ----- ----- ----- -----
Total securities..................... $246,106 $249,450 $207,938 $210,026 $189,518 $190,522
======= ======= ======= ======= ======= =======
</TABLE>
33
<PAGE>
Contractual Maturities and Weighted Average Yields of Securities at Amortized
Cost. The following table sets forth certain information regarding the
contractual maturities and weighted average yields of our securities portfolio
as of December 31, 1998. The state and municipal obligations are the only
securities for which the weighted average yields are shown on a
taxable-equivalent basis.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------------------------------------------------------------------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Treasury and
agency............ $11,291 6.24% $74,475 5.91% $43,248 5.98% $497 6.69% $129,511 5.97%
Mortgaged-backed
securities........ 551 6.88 11,719 5.94 6,371 6.25 4,716 6.40 23,357 6.14
States and municipal
obligations....... 17,076 5.46 54,564 6.05 14,824 6.58 1,104 7.63 87,568 6.04
Corporate bonds..... -- -- 2,245 6.18 -- -- 500 6.25 2,745 6.19
------- ---- ----- ---- ------- ---- --- ---- ----- ----
Total debt securities. 28,918 5.79 143,003 5.97 64,443 6.14 6,817 6.64 243,181 6.01
Equity securities..... -- -- -- -- -- -- -- -- 2,925 6.92
------- ---- --------- ---- ------- ---- ------ ---- ----- ----
Total securities...... $28,918 5.79% $143,003 5.97% $64,443 6.14% $6,817 6.64% $246,106 6.02%
====== ==== ======= ==== ====== ==== ===== ==== ======= ====
</TABLE>
U.S. Treasury Securities. At December 31, 1998, our U.S. Treasury securities
portfolio totaled $24.3 million, of which $18.3 million was classified as
available for sale. At that date $6.0 million was classified as held to
maturity, with a fair value of $6.1 million. The portfolio consists of
securities that mature in less than three years. Our current strategy is to
maintain investments in such instruments to such extent, as they can be used for
liquidity purposes, as collateral for borrowings and for prepayment protection.
Because alternative taxable and tax-exempt investments provided more attractive
yields than U.S. Treasury securities, the portion of our portfolio represented
by such securities declined from 17.4% of the portfolio at December 31, 1997 to
9.8% at December 31, 1998.
U.S. Federal Agency Securities. At December 31, 1998, the U.S. federal agency
securities portfolio totaled $105.8 million, of which $99.3 million was
classified as available for sale. At that date $6.5 million was classified as
held to maturity, with a fair market value of $6.5 million. The agency security
portfolio consists almost exclusively of callable securities. These callable
securities provide additional yield and are maintained at a level consistent
with our interest rate risk profile.
State and Municipal Obligations. At December 31, 1998, our portfolio of state
and municipal obligations totaled $87.7 million, of which $9.2 million was
classified as available for sale. At that date $78.5 million was classified as
held to maturity, with a fair value of $79.8 million. State and municipal
obligations represented 35.4% of the total investment portfolio at December 31,
1998, compared to 29.3% at December 31, 1997. More favorable yields being
available on new purchases of this category of security when compared to other
taxable investment alternatives has accounted for the growth in this portfolio.
Mortgage-backed Securities. Mortgage-backed securities are created by the
pooling of mortgages and the issuance of a security with an interest rate that
is less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although we focus our investments on
mortgage-backed securities backed by single-family mortgages. The issuers of
such securities (generally U.S. Government agencies and government sponsored
enterprises, including FNMA, Freddie Mac and GNMA) pool and resell the
participation interests in the form of securities to investors and guarantee the
payment of principal and interest to these investors. Mortgage-backed securities
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. In addition, mortgage-backed
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain of our liabilities and obligations. At December
31, 1998 we had $23.5 million in mortgage-backed securities, all
34
<PAGE>
classified as available for sale. As with all interest rate-sensitive assets and
liabilities, investments in mortgage-backed securities are maintained at a level
consistent with our interest rate risk profile.
Corporate Bonds. Our corporate bond portfolio at December 31, 1998 totaled $2.8
million, all of which was classified as available for sale. The entire portfolio
was purchased during 1998 to further diversify the investment portfolio and
increase investment yield. Our policy limits investments in corporate bonds to
no more than 10% of total investments and to bonds rated as Baa or better by
Moody's Investors Service, Inc. or BBB or better by Standard & Poor's Ratings
Services.
Equity Securities. At December 31, 1998, equity securities totaled $3.9 million,
all of which was classified as available for sale. The portfolio consisted of a
total of $1.0 million of common stock issued by seven different companies. We
also had $2.8 million and $94,000 of common stock of the FHLB and the Federal
Reserve Bank, respectively.
Deposits
Deposits are our primary funding source for earning assets. We have a broad
array of core deposit products including checking accounts, interest-bearing
transaction accounts (NOW), savings and money market accounts and certificates
of deposit under $100,000. These core deposit products were $678.8 million or
79.8% of our total deposits of $850.5 million at December 31, 1998. Our core
deposit base consists almost exclusively of in-market deposits and there are no
brokered deposits. Our core deposits are supplemented with certificates of
deposit over $100,000 which were $171.6 million at December 31, 1998. Our
certificates of deposit over $100,000 are largely from in-market municipal,
business and individual customers.
Deposits at December 31, 1998 were $850.5 million, an increase of $82.7 million
or 10.8% from $767.7 million at December 31, 1997. Core deposits, principally
certificates of deposit under $100,000, account for $53.1 million of the
increase with certificates of deposit over $100,000 increasing $29.6 million.
The daily average balances, percentage composition and weighted average rates
paid on deposits for each of the years ended December 31, 1998, 1997 and 1996
are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ --------------------------- ---------------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing checking. $91,627 11.5% 1.46% $83,271 11.4% 1.45% $79,976 11.8% 1.55%
Savings and money market.. 163,966 20.5 2.62 166,646 22.8 2.67 179,678 26.6 2.69
Certificates of deposit
under $100,000.......... 274,750 34.4 5.68 248,871 34.1 5.62 225,719 33.3 5.58
Certificates of deposit
over $100,000........... 158,317 19.8 5.64 133,799 18.3 5.64 101,461 15.0 5.55
------- ---- ---- ------- ---- ---- ------- ---- ----
Total interest-bearing
deposits ............... 688,660 86.2 4.38 632,587 86.6 4.30 586,834 86.7 4.14
Demand deposits........... 110,294 13.8 -- 97,510 13.4 -- 90,410 13.3 --
------- ---- ---- ------ ---- ---- ------ ---- ----
Total deposits........ $798,954 100.0% 3.78% $730,097 100.0% 3.72% $677,244 100.0% 3.59%
======= ===== ==== ======= ===== ==== ======= ===== ====
</TABLE>
The following table sets forth our certificates of deposit by time remaining to
maturity at December 31, 1998:
<TABLE>
<CAPTION>
MATURITY
----------------------------------------------------------
3 MONTHS OVER 3 TO 6 OVER 6 TO 12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
------- ------ ------ ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000... $65,188 $53,099 $93,078 $65,629 $276,994
Certificates of deposit over $100,000........ 114,540 27,287 19,771 10,017 171,615
------- ------- -------- ------- --------
Total certificates of deposit.............. $179,728 $80,386 $112,849 $75,646 $448,609
======= ====== ======= ====== =======
</TABLE>
35
<PAGE>
Borrowed Funds
At December 31, 1998, we had total borrowings of $13.9 million, which primarily
consisted of FHLB advances and repurchase agreements entered into with our
business customers. We obtain advances from the FHLB of New York based upon the
collateral of FHLB common stock we own and certain of our residential mortgage
loans, provided certain standards related to credit worthiness have been met.
Such advances are available pursuant to several credit programs, each of which
has its own interest rate and range of maturities. At December 31, 1998, we had
$6.6 million of FHLB advances outstanding and had an additional $43.3 million
available under a line of credit with the FHLB of New York.
Repurchase agreements are contracts for the sale of securities which we own with
an agreement to repurchase those securities at an agreed upon price and date.
Our policies limit the use of repurchase agreements to collateral consisting of
U.S. Treasury and agency securities. We had $5.4 million of repurchase
agreements outstanding as of December 31, 1998, and we averaged approximately
$6.9 million outstanding pursuant to such agreements during 1998.
Other borrowings at December 31, 1998 included $1.7 million of 10% unsecured
notes we issued to former shareholders of First Tier Bank & Trust due March 31,
2000 and $144,000 of mortgage notes which bear interest at a fixed average rate
of 3.76%.
Impact of Inflation
The effects of inflation on the local economy and on our operating results have
been relatively modest for the past several years. Since substantially all of
our assets and liabilities are monetary in nature, such as cash, securities,
loans and deposits, their values are less sensitive to the effects of inflation
than to changing interest rates, which do not necessarily change in accordance
with inflation rates. We try to control the impact of interest rate fluctuations
by managing the relationship between our interest rate sensitive assets and
liabilities. See "--Financial Condition--Management of Interest Rate Risk."
Management of Interest Rate Risk
The principal objective of our interest rate risk management is to evaluate the
interest rate risk inherent in certain assets and liabilities, determine the
appropriate level of risk given our business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the guidelines approved by our Board of Directors to reduce
the vulnerability of our operations to changes in interest rates. Our
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 our
strategic objectives and regularly reviews the activities of our 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. See "Risk Factors--Our Profitability May Be Adversely Affected by
Changes in Interest Rates."
Gap Analysis. 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 our interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or re-price within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest
earning-assets maturing or 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, 1998, our one-year gap position, the difference between the amount of
interest-earning assets maturing or re-pricing within one year and
interest-bearing liabilities maturing or re-pricing within one year, was $35.7
million, or 3.65% of total assets. Accordingly, over the one year period
following December 31, 1998, we will have $35.7 million more in assets
re-pricing than liabilities. Generally if rate-sensitive assets re-price sooner
than rate-sensitive liabilities, earnings will be positively impacted in
36
<PAGE>
a rising rate environment. Conversely, in a declining rate environment, earnings
will generally be negatively impacted. If rate-sensitive liabilities re-price
sooner than rate-sensitive assets then generally earnings will be negatively
impacted in a rising rate environment. Conversely, in a declining rate
environment earnings will generally be positively impacted. Management believes
that our positive gap position will not have a material adverse effect on our
operating results.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 which we
anticipate, based upon certain assumptions, to reprice or mature in each of the
future time periods shown (the "Gap Table"). 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, 1998, 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 2.5%, 12.5%, 15%, 30%, and 40% 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 and 3 to 5 years, respectively. Prepayment and repricing
rates can have a significant impact on our estimated gap. While we believe such
assumptions are reasonable, there can be no assurance that assumed repricing
rates will approximate actual future deposit activity.
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
-----------------------------------------------------------------------------------------------
0-30 DAYS 31-180 DAYS 181-365 DAYS 1-3 YEARS 3-5 YEARS 5-10 YEARS >10 YEARS TOTAL
--------- ----------- ------------ --------- --------- ---------- --------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold..... $16,478 $ -- $ -- $ -- $ -- $ -- $ -- $16,478
Securities (1)......... 10,480 62,249 43,035 63,887 36,779 19,753 11,855 248,038
Loans (2).............. 274,933 56,783 70,650 95,111 59,046 42,910 55,994 655,427
------- ------ ------ ------ ------ ------ ------ -------
Total interest-earning
assets............. 301,891 119,032 113,685 158,998 95,825 62,663 67,849 919,943
------- ------- ------- ------- ------ ------ ------ -------
Interest-bearing liabilities:
Interest-bearing checking,
savings and money
market deposits...... 10,045 50,231 60,278 120,555 160,737 -- -- 401,846
Certificates of deposit 86,413 169,684 116,866 67,425 8,221 -- -- 448,609
Borrowed funds......... 5,366 20 26 1,992 123 6,335 -- 13,862
-------- ---------- -------- -------- -------- ----- ----- --------
Total interest-bearing
liabilities........ 101,824 219,935 177,170 189,972 169,081 6,335 -- 864,317
------- ------- ------- ------- ------- ----- ----- -------
Period gap............... $200,067 $(100,903) $(63,485) $(30,974) $(73,256) $56,328 $67,849 $55,626
======= ======= ====== ====== ====== ====== ====== ======
Cumulative gap........... $200,067 $99,164 $35,679 $4,705 $(68,551) $(12,223) $55,626
======= ====== ====== ===== ====== ====== ======
Period gap to
total assets 20.49% (10.34)% (6.50)% (3.17)% (7.50)% 5.77% 6.95%
===== ====== ===== ===== ===== ==== ====
Cumulative gap to
total assets 20.49% 10.16% 3.65% 0.48% (7.02)% (1.25)% 5.70%
===== ===== ==== ==== ===== ===== ====
Cumulative interest-
earning assets to
cumulative interest-
bearing liabilities 296.48% 130.82% 107.15% 100.68% 92.01% 98.59% 106.44%
====== ====== ====== ====== ===== ===== ======
</TABLE>
- -------------------
(1) Amounts shown are 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.
37
<PAGE>
As a result of these shortcomings, we focus 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.
Net Interest Income at Risk Analysis. In addition to the Gap Analysis,
management uses a "rate shock" simulation to measure the rate sensitivity of our
balance sheet. Rate shock simulation is a modeling technique used to estimate
the impact of changes in rates on our net interest income and economic value of
equity. The following table sets forth the results of our modeling analysis at
December 31, 1998:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C>
200........................ $44,644 $1,401 3.24% $111,350 $(9,886) (8.15)%
100........................ 44,115 872 2.02 117,168 (4,068) (3.36)
Static..................... 43,243 -- -- 121,236 -- --
(100)...................... 41,936 (1,307) (3.02) 123,473 2,237 1.85
(200)...................... 40,874 (2,369) (5.48) 126,527 5,291 4.36
</TABLE>
We measure 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, 1998, a 200 basis point increase in rates would increase our net
interest income by $1.4 million, or 3.24%, over the next twelve month period.
Conversely, a 200 basis point decrease in rates would decrease our net interest
income by $2.4 million, or 5.48%, 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 our 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.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are deposits, proceeds from the principal and
interest payments on loans, proceeds from the sale of mortgage-backed and debt
and equity securities, and to a lesser extent, 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.
We experienced a net increase in total deposits of $82.7 million in 1998, $60.0
million in 1997 and $67.5 million in 1996. Deposit flows are affected by the
level of interest rates, the interest rates and products offered by local
competitors and other factors.
We closely monitor our liquidity position on a daily basis. Excess short-term
liquidity is usually invested in overnight federal funds sold. In the event we
require funds beyond our ability to generate them internally, additional sources
of funds are available through the use of reverse repurchase agreements and
short-term FHLB advances. At December 31, 1998, we had $5.4 million outstanding
in short-term reverse repurchase agreements with third parties. On that date, we
had $6.6 million of FHLB advances outstanding and had approximately $43.3
million available under a line of credit with the FHLB of New York.
Loan commitments totaled $108.0 million at December 31, 1998. We anticipate that
we will have sufficient funds available to meet current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
December 31, 1998 total $373.0 million. Based upon our experience and our
current pricing strategy, we believe that a significant portion of such deposits
will remain with our banks.
38
<PAGE>
At December 31, 1998, we exceeded all of our regulatory capital requirements
with:
* a consolidated leverage capital level of $91.5 million, or 9.58% of
adjusted assets, which is above the required level of $38.2 million, or
4.00% of adjusted assets;
* a Tier 1 risk-based capital of $91.5 million, or 13.71% of adjusted
assets, which is above the required level of $53.4 million, or 8.00% of
adjusted assets; and
* a consolidated risk-based capital of $99.8 million, or 14.96% of
adjusted assets, which is above the required level of $53.4 million, or
8.00% of adjusted assets.
See "Regulatory Capital Compliance" and "Regulation--Regulatory Capital
Requirements."
Our most liquid assets are cash, cash due from banks, interest-bearing deposits
and federal funds sold. The levels of these assets are dependent on our
operating, financing, lending and investing activities during any given period.
At December 31, 1998, cash, cash due from banks, interest-bearing deposits and
federal funds sold totaled $42.8 million, or 4.4% of total assets, as compared
to $40.2 million, or 4.6% of total assets, at December 31, 1997.
IMPACT OF RECENT ACCOUNTING STANDARDS
On January 1, 1998, we adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for reporting and
displaying comprehensive income and its components. Comprehensive income,
presented in the consolidated statement of changes in shareholders' equity and
comprehensive income, consists of net income and net unrealized holding gains
and losses on securities available for sale, net of both the related tax effect
and the reclassification adjustment for gains included in net income. Prior year
consolidated financial statements have been reclassified to conform to the
requirements of this statement. In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information. SFAS No. 131 requires public companies to report
financial and other information about key revenue-producing segments of the
entity for which such information is available and is utilized by the chief
operating decision maker. Specific information to be reported for individual
segments includes profit or loss, certain specific revenue and expense items and
total assets. A reconciliation of segment financial information to amounts
reported in the financial statements is also provided. As a community-oriented
financial institution, substantially all of our operations involve the delivery
of loan and deposit products to customers. Management, through its four
individual autonomous banks, makes operating decisions and assesses performance
based on an ongoing review of these community banking operations. Accordingly,
the four individual banks constitute operating segments for financial reporting
purposes. The statement was effective for our year-end 1998 reporting and did
not impact our financial position or results of operations.
The FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other
Post-retirement Benefits, in February 1998. This statement revises employers'
disclosures about pension and other post-retirement benefit plans. It does not
change the measurement or the recognition of these plans. The statement was
effective for our year-end 1998 reporting and did not impact our financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires us to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for gains and losses resulting from changes in fair
value of the derivative instrument depends on the intended use of the derivative
and the type of risk being hedged. This statement is effective for fiscal years
beginning after June 15, 1999, although earlier adoption is permitted. Based
upon current activities, the adoption of the statement is not expected to have
an effect on our financial position or results of operations. SFAS No. 133 also
permits certain reclassifications of securities to the available for sale
category from the held to maturity category. We have no current intention to
reclassify any securities pursuant to SFAS No. 133.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise which amends SFAS No. 65, Accounting for Certain
Mortgage Banking Activities. This statement conforms the subsequent accounting
for securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the accounting
39
<PAGE>
for such securities by nonmortgage banking enterprises. We adopted this
statement beginning with the first quarter of 1999. We do not expect this
statement to have any impact on our financial position or results of operations
as we do not currently securitize mortgage loans.
YEAR 2000 COMPLIANCE
General
The Year 2000 risk involves computer programs and computer software that are not
able to perform without interruption into the Year 2000. If computer systems do
not correctly recognize the date change from December 31, 1999 to January 1,
2000, computer applications that rely on the date field could fail or create
erroneous results. Such erroneous results could affect interest, payment or due
dates or cause the temporary inability to process transactions, send invoices or
engage in similar normal business activities. If these issues are not addressed
by us, our suppliers and our borrowers, there could be a material adverse impact
on our financial condition or results of operations.
State Of Readiness
We formally initiated our Year 2000 project and plan in September 1997 to ensure
that our operational and financial systems would not be adversely affected by
Year 2000 problems. We have formed a Year 2000 project team and our Board of
Directors and management, as well as those of our subsidiary banks, are
supporting all compliance efforts and allocating the necessary resources to
ensure completion. An inventory of all systems and products (including both
information technology and non-informational technology systems) that could be
affected by the Year 2000 date change has been developed, verified and
categorized as to its importance to us. Also, an assessment of all major
information technology and critical non-information technology systems has been
completed. This assessment involved inputting test data which simulates the Year
2000 date change into such information technology systems and reviewing the
system output for accuracy. Our assessment of critical non-information
technology systems involved reviewing such systems to determine whether they
were date dependent. Based on such assessment, we believe that none of our
critical non-information technology systems is date dependent.
The software for our systems is provided through software vendors. We have
contacted all of our third party vendors and software providers and are
requiring them to demonstrate and represent that their products are or will be
Year 2000 compliant. We have in place an ongoing program of testing compliance
with these representations and warranties. Our core banking software provider,
which supports substantially all of our data processing functions, has warranted
in writing that its software is Year 2000 compliant and complies with applicable
regulatory guidelines. We are currently reviewing the results of the tests we
performed to verify this assertion. We believe we would have recourse against
these vendors and software providers for actual damages incurred by us in the
event the vendors or software providers breach this warranty. In addition, our
compliance and that of our banks with Year 2000 directives and guidelines issued
by the Federal Financial Institutions Examination Council ("FFIEC") and other
bank regulatory agencies has been reviewed by the FDIC, the Federal Reserve
Board, the Office of Comptroller of the Currency and the New York State Banking
Department in 1998 and 1999.
We have completed the following phases of our Year 2000 plan:
* identifying Year 2000 issues;
* assessing the impact of Year 2000 issues on our mission critical
systems;
* upgrading our systems as necessary to resolve those Year 2000 issues
which have been identified; and
* testing and implementing those systems that have been upgraded.
Costs Of Compliance
We do not expect that the costs of bringing our systems into Year 2000
compliance will have a material adverse effect on our financial condition,
results of operations or liquidity. We have budgeted $250,000 to address Year
2000 issues and approximately $100,000 of the budget was expended in 1998. The
largest potential risk to us concerning Year 2000 is the malfunction of our data
processing system. In the event our data processing system
40
<PAGE>
does not function properly, we are prepared to perform critical functions
manually. We believe we are in compliance with regulatory guidelines regarding
Year 2000 compliance, including the timetable for achieving compliance.
Risks Related To Third Parties
We cannot accurately gauge the impact of Year 2000 noncompliance by third
parties with which our banks and we transact business. We have identified our
largest dollar deposit customers (which are aggregate deposits over $250,000)
and our largest commercial/agricultural loan customers (which are loans over
$100,000). Based on information available to us, we conducted a preliminary
evaluation to determine which of those customers are likely to be affected by
Year 2000 issues. We then surveyed those customers deemed at risk to determine
their readiness with respect to Year 2000 issues, including (1) their awareness
of Year 2000 issues, (2) plans to address such issues and (3) progress with
respect to such plans. The survey included 100% of all depositors with average
balances of $250,000 or greater, which is approximately 30% of our total dollar
deposit base. The survey also included approximately 90% of our
commercial/agricultural borrowers of $100,000 or more, which is approximately
50% of our total dollar loan base. The responses to these surveys were due by
December 31, 1998. We are continuing to follow up with those borrowers who have
not responded to the surveys.
As of the date of the prospectus, approximately 40% of such customers have
responded to the survey and (1) all of those customers are aware of Year 2000
issues, (2) all are in the process of updating their systems and (3) all have
informed us that they believe they will be ready for the Year 2000 date change
by the end of 1999. We will continue to review such responses as they are
returned and will encourage customers to resolve any identified problems. To the
extent a problem is identified, we intend to monitor the customer's progress in
resolving such problem. In the event that Year 2000 noncompliance adversely
affects a borrower, we may be required to charge-off the loan to that borrower.
For a discussion of possible effects of such charge-offs, see "--Contingency
Plans" below. In the event that Year 2000 noncompliance causes a depositor to
withdraw funds, we plan to maintain additional cash on hand. We rely on the
Federal Reserve for electronic fund transfers and check clearing and we
understand that the Federal Reserve expects its systems to be Year 2000
compliant in mid-1999. With respect to our borrowers, we include in our loan
documents a Year 2000 disclosure form and an addendum to the loan agreement in
which the borrower represents and warrants its Year 2000 compliance to the bank.
Contingency Plans
We are finalizing our contingency planning with respect to the Year 2000 date
change and believe that if our own systems should fail, we could convert to a
manual entry system for a period of up to three months without significant
losses. We believe that any mission critical systems could be recovered and
operating within seven days. In the event that the Federal Reserve is unable to
handle electronic funds transfers and check clearing, we do not expect the
impact to be material to our financial condition or results of operations as
long as we are able to utilize an alternative electronic funds transfer and
clearing source. As part of our contingency planning, we have reviewed our loan
customer base and the potential impact on capital of Year 2000 noncompliance.
Based upon such review, using what we consider to be a reasonably likely worst
case scenario, we have assumed that certain of our commercial borrowers whose
businesses are most likely to be affected by Year 2000 noncompliance would be
unable to repay their loans, resulting in charge-offs of loan amounts in excess
of collateral values. If this occurs, we believe that it is unlikely that our
exposure would exceed $280,000, although we cannot assure you of this amount and
the amount could be higher. We do not believe that this amount is material
enough for us to adjust our current methodology for making provisions to the
allowance for loan losses. In addition, we plan to maintain additional cash on
hand to meet any unusual deposit withdrawal activity.
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BUSINESS
OUR COMPANY
We are a bank holding company headquartered in Warsaw, New York, which is
located 45 miles southwest of Rochester and 45 miles southeast of Buffalo. We
operate as what is referred to in the banking industry as a super-community bank
holding company--a bank holding company that owns multiple community banks that
are separately managed. We own four commercial banks that provide consumer,
commercial and agricultural banking services in Western and Central New York
State. We were 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, we have grown through a combination of
internal growth, the opening of new branch offices and the acquisition of a
community bank and branches of other banks. On December 31, 1998, we had assets
of $976.2 million, loans receivable of $655.4 million, deposits of $850.5
million and shareholders' equity of $96.6 million.
As a super-community bank holding company, our strategy has been to manage our
bank subsidiaries on a decentralized basis. We feel that this strategy provides
each bank with the flexibility to efficiently serve its markets and respond to
local customer needs. Under our structure, each bank retains its name and board
of directors as well as substantial autonomy in its day-to-day operations. The
presidents of our banks are empowered to set goals and implement employee
incentive programs to maximize their bank's performance. While we generally
operate on a decentralized basis, we have consolidated selected lines of
business, operations and support functions in order to achieve economies of
scale, greater efficiency and operational consistencies.
OUR BANKS
We operate through four subsidiary banks: Wyoming County Bank, The National Bank
of Geneva, The Pavilion State Bank and First Tier Bank & Trust. Our banks
operate 28 branches and 35 ATMs in eight contiguous counties of Western and
Central New York State: Allegany, Cattaraugus, Genesee, Livingston, Ontario,
Seneca, Wyoming and Yates. We have opened five new branches in the past four
years, and we expect to open a new branch in Monroe County in the second half of
1999. This new branch will be our first branch in the county in which Rochester
is located. A brief description of each of our banks is set forth below.
Wyoming County Bank
Wyoming County Bank (or "WYCO") is headquartered in Warsaw, New York and was
chartered in 1851 by the New York State Superintendent of Banks. Prior to the
formation of FII, WYCO had been owned and managed by members of the Humphrey
family since 1869. WYCO has 11 full-service banking offices and 12 ATMs in
Wyoming, Livingston and Cattaraugus Counties. According to FDIC-published data,
it commands the largest market share of deposits in Wyoming County and the
second-largest share in Livingston County. In 1997, WYCO ranked as the largest
agricultural lender in New York State and the eighth-largest lender in the
United States under the FSA loan program. It was also rated the "friendliest
small business lender" in New York State in the $100 million - $500 million
asset size category by the SBA in 1997. Through its trust department, WYCO
provides a wide variety of trust and fiduciary services. WYCO has an application
pending with the New York State Superintendent of Banks to open a branch in
Honeoye Falls in Monroe County, which is located in one of the fastest-growing
towns in that county. As of December 31, 1998, WYCO had assets of $372.9
million, loans of $261.5 million, deposits of $328.4 million and shareholders'
equity of $38.9 million.
The National Bank of Geneva
The National Bank of Geneva (or "NBG"), founded in 1817, is a national bank
engaged in commercial banking as authorized by the National Bank Act. NBG's main
office is located in Geneva, New York, and it has six full-service banking
offices and 13 ATMs in Ontario, Seneca and Yates Counties. NBG is one of the top
agricultural and Small Business Administration lenders in New York State. In
1997, it was named "Business of the Year" by the Geneva Area Chamber of
Commerce. NBG has also played a major role in financing new economic expansion
in the region such as the BonaDent Dental Laboratories, a new resort hotel on
Seneca Lake and the Finger Lakes Outlet Mall.
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NBG is in the process of obtaining trust powers. According to FDIC-published
data, it enjoys the largest deposit market share in Yates County and the second
largest share in Ontario County. NBG opened its first Seneca County branch in
October, 1998 and comparable data for that branch as of June 30, 1998 does not
exist. If the Seneca County branch had been open on June 30, 1998 and had
deposits at that time equal to its deposits on December 31, 1998, it would have
had the sixth largest deposit market share in Seneca County on that date. As of
December 31, 1998, NBG had assets of $372.1 million, loans of $243.2 million,
deposits of $327.6 million and shareholders' equity of $34.4 million.
The Pavilion State Bank
The Pavilion State Bank (or "PSB") is a New York State-chartered bank that was
founded in 1928 and has its main office in Pavilion, New York. Prior to the
formation of FII, PSB had been owned and managed by members of the Humphrey
family since its inception. PSB has five full-service banking offices (including
an in-store branch at a Tops supermarket in Batavia) and three ATMs in Genesee
and Livingston Counties. Due to its proximity to the western suburbs of
Rochester, PSB attracts deposits from Monroe County as well. According to
FDIC-published data, PSB has the fourth-largest deposit market share in Genesee
County. In 1998, PSB was named "Business of the Year" by the Genesee County
Chamber of Commerce. As of December 31, 1998, PSB had assets of $125.5 million,
loans of $86.6 million, deposits of $109.0 million and shareholder's equity of
$11.1 million.
First Tier Bank & Trust
First Tier Bank & Trust (or "FTB") is a New York State-chartered bank (chartered
in 1902 as the Salamanca Trust Company) headquartered in Salamanca, New York. We
acquired FTB in March 1990. It has six full-service banking offices and seven
ATMs in Allegany and Cattaraugus Counties, and utilizes its trust powers to
provide fiduciary and administrative services to its customers. According to
FDIC-published data, FTB has the third-largest deposit market share in
Cattaraugus County and the fifth-largest share in Allegany County. As of
December 31, 1998, FTB had assets of $100.3 million, loans of $64.2 million,
deposits of $89.1 million and shareholder's equity of $8.3 million. At the time
we acquired FTB, it had assets of $40.0 million, loans of $26.3 million and
deposits of $34.8 million.
OUR SERVICES AND PRODUCTS
Our banks provide a wide range of consumer and commercial banking services and
products to individuals, municipalities and small and medium size businesses,
including agribusiness. Our consumer banking services include checking and
savings accounts, money market accounts, debit and credit cards, certificates of
deposit, individual retirement accounts, home equity lines of credit,
residential mortgage loans, home improvement loans, student loans, automobile
loans, personal loans, safe deposit boxes and Christmas clubs. Our commercial
and agricultural banking services and products include business checking
accounts, cash management accounts, commercial and agricultural working capital
and revolving lines of credit, commercial and agricultural mortgages, equipment
loans and leases, crop and cattle loans, letters of credit and accounts
receivable factoring. We also provide payroll direct deposit and cash management
services and act as a depository and collection agent for municipal tax
receipts. Each of our banks offer similar types of services and products, but
they tailor aspects of them to address local market conditions.
In addition to traditional banking services, we provide a variety of fee-based
services. We service a portfolio of mortgages that we originated and sold,
aggregating $177.8 million and generating $1.2 million in service income during
1998. Since 1994, we have been offering, through a "dual employee" program with
Invest Financial Services Corporation, a wide range of mutual fund and variable
annuity products to our customers. During 1998, our sales of these investment
products exceeded $25 million and generated over $672,000 in net commissions and
fees. We are in the process of establishing our own brokerage operation to
enable us to expand the scope of investment products that we offer and to
complement our trust business. Our trust business is presently conducted by
Wyoming County Bank and First Tier Bank & Trust. These banks have trust powers
and render services as trustee, executor, administrator, guardian, managing
agent, custodian and other fiduciary activities authorized by law. The National
Bank of Geneva is in the process of obtaining trust powers. We are also
exploring the acquisition of insurance agency operations that would further
enhance our position as a full-service provider of financial services.
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While our banks function as community banks, we provide our customers with a
broad range of competitive services generally provided only by larger, regional
banks. Currently, we provide customers with 24 hour ATM access, telephone
customer service and 24 hour automated telephone account access. Those of our
banks that are located near college communities (such as SUNY Geneseo, Hobart
and William Smith College and St. Bonaventure University) maintain ATMs on
campus to introduce students to the banks. Each of our banks offer interactive
internet banking and bill paying services, and provide general bank information
through web sites maintained by each bank. We are planning to introduce a
corporate cash management account module to our existing internet banking
program during the second quarter of 1999.
OUR OPERATING STRUCTURE AND PHILOSOPHY
All of our banks are separate wholly-owned subsidiaries of FII (except for
statutory directors' shares in the case of The National Bank of Geneva
aggregating 0.90% of its outstanding shares and 0.35% of the shares of Wyoming
County Bank). We manage our banks using the super-community banking model which
allows each bank to operate with substantial autonomy, thereby increasing their
responsiveness to local needs and differentiating them from other large
competitors. Each of our banks is managed by a separate Board of Directors and a
local president. Each bank also has advisory boards of local community leaders
and businesspeople, who provide an important network of business contacts. Our
banks are also operated as separate profit centers, with a significant portion
of each bank president's compensation tied to his bank's performance. Our banks
seek to develop broad customer relationships in the communities they serve by
providing exceptional service, offering local convenience and establishing
strong community ties. Many of our board members and officers actively
participate in civic and public service activities in the local communities we
serve in order to maintain community relationships, to monitor market conditions
and customer needs and to help improve the quality of life in the community. The
satisfactory ratings in Community Reinvestment Act examinations that our banks
have consistently received is one indicator of their commitment to the
communities they serve.
We have invested heavily in our officers and employees by recruiting talented
bankers in our various market areas and rewarding performance with economic
incentives. Generally, performance-based compensation accounts for between
20-30% of the compensation of each member of the senior management team. We seek
to develop a strong sales culture in each of our banks, with an emphasis on
business development at the advisory board and loan officer level, and on
customer relationship development at all levels. Each branch manager is
empowered to offer a range of services and products tailored to the needs of the
customers of that branch, and is encouraged to regard his or her branch as a
franchise to be developed. Under our team incentive program, every branch
employee is incentivized to cross-sell to existing customers and to identify
prospective customers. Other incentives exist at the branch manager level,
designed to motivate "high performance banking" in each branch.
FII provides operational and support functions for each bank which create
economies of scale and greater efficiency. In early 1997, we opened a new
operations center at our headquarters in Warsaw where we consolidated selected
lines of business, operations and support functions to achieve both quality
control and cost savings. The consolidated operations include data processing,
accounting, deposit operations, item processing, salary and benefits
administration, audit and compliance and training functions. To maximize our
ability to perform these functions efficiently on a consolidated basis, we
upgraded our IBM AS/400 mainframe computer system and telecommunications network
in 1998. Our upgraded system, utilizing Jack Henry & Associates' Silverlake
application software, permits us to maintain financial information on a fully
integrated, on-line, consolidated basis, which allows both the subsidiary banks
and us to have access to this information. We are frequently invited by Jack
Henry & Associates to "market test" new products and applications. Our
infrastructure of technological and back office support has the capacity to
serve the current needs of our banks and has significant excess capacity to
service the additional needs created by our anticipated future expansion, either
by means of internal growth or through acquisitions.
Consistent with our super-community model, FII makes strategic decisions and
establishes the overall policies for the combined entity. FII provides the banks
with guidance in the areas of credit policy and administration, strategic
planning, asset/liability management, investment portfolio management, human
resources management, audit procedures and other financial and administrative
services. FII acts as a clearinghouse for information--sharing good ideas
developed at the individual banks with the other banks and communicating with
each of the banks about problems identified or encountered at the other banks.
At present, there are seven holding-company level
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management committees--executive, asset/liability, loan administration,
operations, sales, training and marketing--that contain both holding company and
bank representatives. These committees function to coordinate and centralize
policy-making in these key areas.
Although the super-community banking model has many benefits, there are inherent
risks associated with decentralized management. To counter these risks, we have
implemented measures designed to ensure that the banks consistently follow our
policies and maintain our conservative lending approach and strong asset
quality. For example, our Chief Executive Officer is a member of the Board of
Directors of each of the banks and he must be given advance notice of all
significant actions that will be proposed by the management of a bank to its
board. In addition, we use a third party loan review firm to systematically
review the loan portfolios originated and maintained by each of our banks. We
also actively monitor the financial condition of the banks on a consolidated
basis to ensure that our overall operations are consistent with our policies and
objectives.
OUR MARKET POSITION
The eight-county market that we serve is predominately a region of dairy and
cash crop farms and small, rural towns; however, it also encompasses the growing
suburbs and exurbs of Rochester and Buffalo, the two largest cities in New York
State outside of New York City, which have combined metropolitan area
populations of over two million people. Based on FDIC-published data, as of June
30, 1998, our banks had the largest deposit market share in Livingston, Wyoming
and Yates Counties, the second largest share in Ontario County, the third
largest share in Genesee and Cattaraugus Counties and the fifth largest share in
Allegany County. Wyoming County Bank ranked as the largest agricultural lender
under the federally-guaranteed FSA program in New York State and the eighth
largest in the United States.
Our market area is geographically and economically diversified because we serve
both rural markets and, increasingly, the larger more affluent markets of
suburban Rochester and suburban Buffalo. Our rural markets have a diverse
economic base which includes farming and farm-related industry, light and heavy
manufacturing, educational facilities, natural resources and tourism. The
variety of our rural customer base allows us to spread our lending risk
throughout a number of different industries. The metropolitan economies of
Rochester and Buffalo provide us with the opportunity to further diversify the
industries represented in our loan portfolio. We anticipate allocating more
resources to increase our presence in the markets around these two cities. By
doing so, we hope to fill the void created by the acquisition of many of the
independent community banks that once served those areas.
Our super-community banking strategy competitively positions us as one of the
few mid-sized financial institutions in our market that combines responsive
community banking with the sophistication, capacity and range of services and
products of a larger regional bank holding company. We believe that we have been
able to compete effectively with larger and smaller financial institutions by
offering a broad range of services and products that respond to specific needs,
emphasizing competitive pricing, providing superior customer service and
utilizing local decision-making. By doing so, we have established long-term
customer relationships and built customer loyalty. We believe that our
competitive advantage in our market is strengthened by our deep roots in the
region and our dominant market share in the communities we presently serve.
Over the course of the last decade, a number of community banks and thrifts
operating in our market have been sold or placed into receivership by the
Resolution Trust Corporation or the FDIC during the banking crisis of the late
1980s and early 1990s. Banks that no longer independently exist include Central
Trust Company, Columbia Savings Bank, Goldome F.S.B., Monroe Savings Bank,
Empire of America FSB, First Federal Savings and Loan Association of Rochester,
First National Bank of Rochester, Onbank and Rochester Community Savings Bank.
In addition, the large commercial banks operating in the region now are less
associated with the area than they once were. For example, The Chase Manhattan
Bank acquired its presence by purchasing Lincoln First Bank of Rochester in
1984. Following its merger with Chemical Bank, it has consolidated many of what
were formerly local functions and decision-making into its New York City
headquarters. Also, HSBC Bank, formerly known as Marine Midland Bank, was
founded and based in Buffalo. It is now a subsidiary of an international bank
holding company based in Hong Kong. Fleet National Bank is the successor entity
of Fleet Bank of New York, which acquired Norstar Bank in the late 1980s. With
the pending merger of Fleet Financial Corporation and BankBoston, we believe
that Fleet National Bank's focus may shift to consolidating its position in New
England, possibly resulting in branch divestitures in rural areas of our market.
We believe that the remaining large banks in our market will find it
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increasingly difficult to remain competitive in the more rural areas and will
likely continue to refocus their resources toward the more urban areas. We feel
that we are well positioned to attract customers disaffected with the
metropolitan focus of these large banks and to be a competitive acquiror of any
branches sold by the large banks who choose to reduce their operations in the
rural markets. Further, we believe that we are well positioned to be an
attractive acquiror of community banks in our market who may choose to affiliate
with a larger, locally-based institution with a broader range of services,
products and back-office support.
We have a track record of successfully negotiating the acquisition of and
integrating bank branches and small banks. Our historical acquisition activity
has included the purchase of Wyoming County Bank's Attica branch from Security
Trust Company in 1984, Salamanca Trust Company (now First Tier Bank & Trust) in
1990, First Tier Bank & Trust's Allegany branch from Manufacturer's Hanover
Trust in 1992 and two branches in Yates County (acquired by The National Bank of
Geneva) and Livingston County (acquired by Wyoming County Bank) from the
Resolution Trust Corporation as receiver of Columbia Federal Savings Bank in
1994. All of our acquisitions have been profitably integrated into our
operations.
COMPETITION
The banking business is highly competitive, and our profitability depends
principally upon our ability to compete in the market areas in which our banking
operations are located. We compete with other commercial banks, savings banks,
savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking firms, asset-based
non-bank lenders and certain other nonfinancial entities, including retail
stores that maintain their own credit programs and certain governmental
organizations which may offer more favorable financing than we offer. Our
primary competitors are large commercial banks such as The Chase Manhattan Bank,
Fleet National Bank, HSBC Bank (formerly Marine Midland Bank), Key Bank and M&T
Bank and small local banks, savings banks and credit unions.
OUR GROWTH STRATEGY
Our primary business objectives are to enhance our profitability and be the
dominant financial services provider in our market. We have engaged in long-term
strategic planning for many years and, in 1998, we adopted an updated
comprehensive strategic plan after conducting a detailed examination of the
performance and market prospects of each of our banks and our company as a
whole. This section outlines some key elements of our strategy for future
growth.
Expand Traditional Banking Base
In recent years, we have grown in each of the markets in which we operate. Our
primary goal is to continue to expand our traditional banking base by increasing
the number of households and businesses served in our market and targeted new
markets. We intend to achieve such expansion by continuing to provide a high
level of customer service, competing for customers of recently acquired banks in
our market area, offering a broad range of services and products at competitive
prices and implementing new technologies and delivery systems. We are
continually exploring new and alternative delivery channels for our services and
products, including telephone banking, internet banking, in-store branches,
automated bill payment services and ATMs. We intend to continue seeking
opportunities to expand either by acquiring existing banks or branches of banks
or by establishing new branches. By expanding our traditional banking base,
coupled with careful asset-liability management, low-cost core deposits and
prudent loan underwriting and investments, we seek to increase our net interest
income.
Strengthen Sales Culture
We recognize that our existing customers represent an attractive opportunity to
expand our business. Accordingly, we seek to increase the number of bank
services and products used by each of our customers. This strategy complements
our strategy of increasing noninterest revenues because it emphasizes the sale
of different types of services and products. We actively train employees to
cross-sell our services and products, are expanding our use of software and
other systems to identify cross-selling opportunities and provide performance
incentives to our
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managers and employees for cross-selling success. Effective cross-selling aimed
at satisfying the needs of our customers should enhance their satisfaction and
our retention of their business.
Increase Noninterest Revenues
In order to lessen our reliance on our net interest income we are seeking to
increase our noninterest revenues. We plan to increase our noninterest revenues
by continually offering expanded and new fee-based bank services and products.
We are in the process of expanding the trust operations of our banks beyond the
two which currently have trust powers and establishing our own brokerage
operation to enable us to expand the scope of investment products that we offer
and to complement our trust business. We are also exploring the acquisition of
insurance agency operations that would further enhance our position as a
full-service provider of financial services. We are evaluating other types of
services that we can offer such as real estate appraisals, leasing, payroll
processing and title insurance.
Focus on Efficiency
While we have a very favorable efficiency ratio, our goal is to reduce it even
further. We plan to continue to maintain tight control of overhead and expenses
and to further centralize common functions presently performed by all four banks
to the extent that such centralization can be accomplished without undermining
the benefits we get from our super-community banking model. We believe that by
increasing our use of technology that we have already implemented, and by
further centralizing back office operations, we can accommodate substantial
additional growth without incurring proportionately greater operational costs.
Preserve Conservative Credit and Interest Rate Risk Profile
While we plan to expand our business, we understand that if we do so by simply
loosening our credit standards, the result may be loan losses that are greater
than the additional revenues generated by such loans. As a result, we are firmly
committed to continuing to maintain our asset quality through our conservative
credit culture and continuing to actively manage our exposure to interest rate
risk.
Retain and Attract Talented Employees
We seek to retain, attract and incent talented management, employees and
directors with a corporate culture emphasizing integrity, teamwork, customer and
community focus and personal initiative. Our decentralized super-community
management structure and emphasis on performance-based compensation provide
significant opportunity for responsibility, accountability and reward for highly
motivated employees. We will continue to offer and expand employee training,
resource support and incentive compensation to retain and attract individuals
who can perform well within our organization.
OUR EMPLOYEES
Together with our banks, we have approximately 340 full-time and 100 part-time
employees. We consider our relationship with our employees to be very good. We
perform an annual corporate culture survey to assist management in continuously
improving this relationship. We believe that we must have a high-performance
team of employees to be a high-performance company. Our human resource
management and compensation programs are designed and managed to support this
philosophy.
OUR PROPERTIES
We currently conduct our business through our corporate office and our full
service bank offices and branches. Our new headquarters and operations center is
located in Warsaw, New York. We lease this facility for a nominal rent from the
Wyoming County Industrial Development Agency for local tax reasons and have the
right to purchase it for nominal consideration beginning in November, 2006. The
following table lists the properties of each of our subsidiary banks:
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LEASED OR EXPIRATION
LOCATION TYPE OF 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
THE NATIONAL BANK OF GENEVA
Geneva........................ Main Office Own --
Canandaigua................... Branch Own --
Seneca County................. Branch Own --
Penn Yan...................... Branch Own --
Plaza......................... Branch Ground Lease December 2016
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
FIRST TIER BANK & TRUST
Salamanca..................... Main Office Own --
Ellicottville................. Branch Own --
Allegany...................... Branch Own --
Olean......................... Branch Own --
Cuba.......................... Branch Lease November 2007
LEGAL PROCEEDINGS
From time to time we and our banks are parties to or otherwise involved in legal
proceedings arising in the normal course of our business. We do not believe that
there is any pending or threatened proceeding against us or the banks which, if
determined adversely, would have a material effect on our business, results of
operations or financial condition.
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SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their subsidiaries
is intended primarily for the protection of depositors, the deposit insurance
funds regulated by the FDIC and the banking system as a whole, and not for the
protection of shareholders or creditors of bank holding companies. The various
bank regulatory agencies have broad enforcement power over bank holding
companies and banks, including the power to impose substantial fines,
operational restrictions and other penalties for violations of laws and
regulations.
The following description summarizes some of the laws to which we and our
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. We believe that we are
in compliance in all material respects with these laws and regulations.
THE COMPANY
We are a bank holding company registered under the Bank Holding Company Act, and
are 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 "risk-weighted" asset base. The guidelines
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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, 1998, our ratio of Tier 1 capital
to total risk-weighted assets was 13.71% and our ratio of total capital to total
risk-weighted assets was 14.96%. 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, 1998, our leverage ratio was
9.58%.
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, such as we will
be upon consummation of the offering, would, under the circumstances set forth
in the presumption, constitute acquisition of control of FII.
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 our outstanding
common stock, or otherwise obtaining control or a "controlling influence" over
us.
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THE BANKS
WYCO, PSB and FTB are New York State-chartered banks, and NBG is a national bank
chartered by the Office of the Comptroller of Currency. All of the deposits of
our four subsidiary banks are insured by the FDIC through the Bank Insurance
Fund. FTB is a member of the Federal Reserve System. Our 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 FII or our 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 our operating funds and,
for the foreseeable future, we anticipate that dividends paid by the banks will
continue to be our 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 we are a legal entity separate and distinct from our subsidiaries, our
right to participate in the distribution of assets of any subsidiary upon the
subsidiary's liquidation or reorganization will be subject to the prior claims
of the subsidiary's creditors. In the event of a liquidation or other resolution
of an insured depository institution, the claims of depositors and other general
or subordinated creditors are entitled to a priority of payment over the claims
of holders of any obligation of the institution to its shareholders, including
any depository institution holding company (such as us) or any shareholder or
creditor thereof.
Examinations. The New York State Banking Department (in the case of WYCO, 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 our
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
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
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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 us. As of December 31, 1998, the ratio
of Tier 1 capital to total risk-weighted assets for our banks was 14.96% for
WYCO, 12.08% for NBG, 12.82% for PSB and 12.74% for FTB, and the ratio of total
capital to total risk-weighted assets was 16.21% for WYCO, 13.21% for NBG,
14.07% for PSB and 14.00% for FTB. See "Management's Discussion and Analysis of
Financial Condition and Result of Operation--Liquidity and Capital Resources."
The FDIC's leverage guidelines require state banks to maintain Tier 1 capital of
no less than 5.0% 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, 1998, the ratio of Tier 1 capital to average total assets (leverage
ratio) was 9.88% for WYCO, 9.14% for NBG, 8.74% for PSB and 8.14% for FTB. See
"Management's Discussion and Analysis of Financial Condition and Result of
Operation of the Company--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 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
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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. The
Bank Insurance Fund rate must equal one-fifth of the Savings Association
Insurance Fund rate through year-end 1999, or until the insurance funds are
merged, whichever occurs first. Thereafter Bank Insurance Fund and Savings
Association Insurance Fund payers will be assessed pro rata for the Financing
Corporation bond obligations. With regard to the assessment for the Financing
Corporation obligation, the current Bank Insurance Fund rate is 0.0122% of
deposits.
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 us or our 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. The appropriate federal banking agency may appoint the FDIC as
conservator or receiver for a banking institution (or the FDIC may appoint
itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation: the banking institution is
undercapitalized and has no reasonable prospect of becoming adequately
capitalized; fails to become adequately capitalized when required to do so;
fails to submit a timely and acceptable capital restoration plan; or materially
fails to implement an accepted capital restoration plan.
Brokered Deposit Restrictions. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or roll over
brokered deposits.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which
generally makes commonly controlled insured depository institutions liable to
the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA") and
the regulations issued thereunder are intended to encourage banks to help meet
the credit needs of their service area, including low and moderate income
neighborhoods, consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's record in meeting
the needs of its service area when considering applications regarding
establishing branches, mergers or other bank or branch acquisitions. FIRREA
requires federal banking agencies to make public a rating of a bank's
performance under the CRA. In the case of a bank holding company, the CRA
performance record of the banks involved in the transaction are reviewed in
connection with the filing of an application to acquire ownership or control of
shares or assets of a bank or to merge with any other bank holding company.
An unsatisfactory record can substantially delay or block the transaction.
Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein, our 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
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requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits or making loans to such customers. Our 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. Recently, both the House and
Senate Banking Committees have approved a major financial services reform bill,
the Financial Services Act of 1999 (H.R. 10) which, if it becomes law, would
repeal the Glass-Steagall Act and permit cross-ownership and affiliations among
bank holding companies, securities and insurance firms, as well as permit new
investments by bank holding companies in non-banking businesses. While it is
uncertain what the final form of the legislation will be, and whether any reform
legislation will be enacted at all, if enacted, such legislation could change a
number of banking statutes and our operating environment in substantial and
possibly unpredictable ways. We cannot determine the ultimate effect that such
legislation, if enacted, or implementing regulations with respect thereto, would
have upon our financial condition or results of operations.
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 are possessed of 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. The FDIC Improvement Act,
FIRREA and other laws have expanded the agencies' authority in recent years, and
the agencies have not yet fully tested the limits of their powers.
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. The nature of future monetary policies and the effect of such
policies on our business and earnings cannot be predicted.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the directors and executive officers of FII:
Name Age Position
---- --- --------
W.J. Humphrey, Jr. 75 Director, Chairman of the Board
Peter G. Humphrey 44 Director, President and Chief Executive
Officer
Jon J. Cooper 46 Director, Senior Vice President of FII,
President of WCB
Barton P. Dambra 57 Director
James R. Hardie 56 Director
Donald G. Humphrey 68 Director
W.J. Humphrey, III 48 Director, Senior Vice President of FII,
President of PSB
Thomas L. Kime 45 Director, Senior Vice President of FII,
President of NBG
H. Jack South 72 Director
Donald I. Wickham 65 Director
James H. Wyckoff 47 Director
Randolph C. Brown 45 Senior Vice President of FII, President
of FTB
Regina R. Colegrove 49 Vice President, Manager of Human Resources
Sonia M. Dumbleton 37 Vice President, Manager of Internal Audit
& Compliance
David L. MacIntyre 53 Assistant Vice President, Manager of
Investment Services
R. Mitchell McLaughlin 41 Vice President, Manager of Operations
Ronald A. Miller 50 Senior Vice President, Chief Financia
Officer
Steven S. Perl 32 Vice President, Controller
BIOGRAPHICAL INFORMATION
W. J. Humphrey, Jr. has been a director since 1948 and Chairman of the Board
since 1991. He is the retired President of FII and WYCO. He serves as director
of WYCO, PSB and is a Director Emeritus of NBG. He is a former director of
Rochester Telephone (Frontier Corp.) and The Automobile Club of Buffalo. He is a
former Chairman of the Genesee State Park and Recreation Commission and served
as Commissioner from 1963-1981. He served as Director and President of the
Society for the Genesee and the Lakes and is a former President of the Wyoming
County Industrial Development Corporation.
Peter G. Humphrey has served as a director since 1983. Since 1994, he has been
President and Chief Executive Officer of FII. He joined WYCO in 1979 after
completing Marine Midland Bank's management training program. He became
President of WYCO in 1986 and is currently a director and Chairman of that bank.
He is also a director and Chairman of FTB and a director of PSB and NBG. He is a
past president of the Independent Bankers Association of New York State and was
recently elected Treasurer of the New York Bankers Association. Long active in
community and trade association affairs, he was appointed in 1994 by Governor
George Pataki as Chairman of the Genesee Region of the New York State Parks,
Recreation and Historic Preservation Commission.
Jon J. Cooper has served as a director since 1997. Since 1998 he has been the
President and Chief Executive Officer of WYCO after serving as the President and
Chief Operating Officer starting in 1997. Prior to joining WYCO he was a Senior
Vice President with Fleet Bank in Buffalo in the small business lending group.
As a member of their consumer banking division, he was responsible for managing
the key retail branch locations in the Western New York area. He serves on the
Board of Directors of the Wyoming County Business Development Council and the
Genesee Community College Foundation. He is a member of the SUNY Geneseo College
Advisory Council.
Barton P. Dambra has served as a director since 1993 and is a director of PSB.
He is currently President of Markin Tubing and has served in that position since
1978. Prior to that he was a partner with Knauf & Knauf, an accounting firm
located in Rochester, New York. He has been a certified public accountant since
1967. He is a board member
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of the LeRoy Historical Society and a member of the American Institute of
Certified Public Accountants, New York State Society of Certified Public
Accountants and the LeRoy Sports Boosters. He is a past President and board
member of the LeRoy Rotary, served on the LeRoy United Way Committee, was a
charter member of the Private Industry Council and was previously a member of
the Wyoming County Business Development Corporation.
James R. Hardie has served as director since 1997. He is the President and
founder of Austin Hardie Wise Agency, Inc., an insurance agency located in
Attica, New York. He also serves as a director of the WCB. He is a director of
the Wyoming County Business Development Corp. and Chairman of the Wyoming County
Republican Booster Club. He is Vice President of Combined Financial Services. He
is a past President of the Attica Lions Club, a past President of the Bennington
Jaycees, and a past Vice President of the Attica Central School Board. He
previously served as Chairman of the Town of Bennington Zoning Board and as a
director of Genesee Country Bank and the Automobile Club of Western New York.
Donald G. Humphrey has served as a director since 1958. He is the retired Vice
President and Chief Mortgage Officer of WCB. He volunteers for the Coast Guard
Auxiliary and is a member of the Warsaw Kiwanis Club. He is a board member of
the Silver Lake Country Club, of which he is a past President.
W. J. Humphrey, III has served as a director since 1982. He has been the
President and Chief Executive Officer of PSB since 1981 and a Senior Vice
President of FII since 1982. Prior to joining FII, he was an employee of Marine
Midland Bank and is a graduate of its credit training program. He is Chairman of
the Genesee County Comprehensive Master Plan, Genesee 2000 and President of the
Genesee County Business Education Alliance. He is President of GLOW School to
Work and, in 1996, was appointed by Governor George Pataki as a trustee of
Genesee Community College SUNY. He serves on the Board of Directors of the New
York Bankers Association and is Chairman of the New York Bankers Group 1. He is
a member of the Rochester/Finger Lakes Regional Advisory Board of Empire State
Development Corporation.
Thomas L. Kime has served as a director since 1989. He has been the President
and Chief Executive Officer of NBG since 1989 where he began in 1976 as an
agricultural and commercial lender. He has also served as an investment officer.
He became a director of NBG in 1981. He is active in the City of Geneva, Seneca
County and Ontario County economic development organizations, and is a member of
the board of directors of the Independent Bankers Association of New York State.
He serves as a director of the Finger Lakes Regional Health System, is Chairman
of the Board of the Finger Lakes Cooperative Insurance Company and is a member
of the Finger Lakes Community College Foundation Board.
H. Jack South has served as a director since 1998. He has been a director of FTB
since 1989. He is a past director and treasurer of Holimont ski resort. He is a
past national President of Ductile Iron Society and served as trustee of the
Foundry Educational Foundation.
Donald I. Wickham has served as a director since 1993 and has been a director of
NGB since 1973. Since 1996 he has been an associate with Klassen Associates, a
business brokerage firm located in Rochester, New York. Prior to that he was
President of Globe Travel in Fairport, New York. From 1984 to 1988 he served as
a director of the Buffalo Branch of the Federal Reserve Board (New York City).
He previously served as a director of Curtice Burns Foods, Inc. and is a past
President of Pro-Fac Cooperative, Inc. He is a former member of the Cornell
University Agriculture Advisory Board.
James H. Wyckoff has served as a director since 1985. He is currently serving a
dual appointment as Associate Professor of the Department of Public
Administration and the Department of Economics at SUNY Albany. He is a faculty
member of the Public Policy Program. He is a director of the American Education
Finance Association, the Albany Academy of Finance and is a member of the
National Academy of Sciences. He has been an active member of various New York
State Regents study groups. He teaches graduate and undergraduate courses in
public finance, public affairs and economics.
Randolph C. Brown has served as Vice President since 1991 and was elected Senior
Vice President in 1998. He has been the President and Chief Executive Officer of
FTB since 1991. Prior to joining FTB, he was a commercial loan officer with
Community Bank Systems and, before that, was a regional senior lender at Fleet
Bank.
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Regina R. Colegrove has served as Vice President since 1991. Previously she
served as Assistant Vice President and Director of Human Resources at WYCO.
Sonia M. Dumbleton has served as Vice President since 1996. She has been a
Senior Internal Auditor with FII since 1984.
David L. MacIntyre has served as an Assistant Vice President since 1998 and has
been FII's investment products manager since 1993. Previously he was a financial
services consultant with Citicorp Investment Services in Rochester, New York.
R. Mitchell McLaughlin has served as Vice President since 1995. He previously
served as Senior Vice President and Financial Officer of WYCO.
Ronald A. Miller has served as Senior Vice President and Chief Financial Officer
since 1996. From 1994 to 1996 he was Senior Vice President and Controller of a
Retail Banking Division of Fleet Financial Group. From 1988 to 1994 he served as
Senior Vice President and Controller of Fleet Bank, Albany, New York.
Steven S. Perl has served as Vice President since 1998 and Controller since
1997. From 1995 to 1997 he was Vice President and Financial Officer of FTB. From
1992 to 1995 he was employed by Citibank, N.A. in its trust and cash management
divisions.
TERMS AND COMMITTEES OF THE BOARD OF DIRECTORS
Directors are elected for three year terms, classified into Classes I, II and
III. Messrs. __________, __________ and __________ are Class I directors with
terms of office expiring on the date of our annual meeting of shareholders in
2000; Messrs. __________, __________ and __________ are Class II directors with
terms of office expiring on the date of our annual meeting of shareholders in
2001; and Messrs. __________ and __________ are Class III directors with terms
of office expiring on the date of our annual meeting of shareholders in 2002.
Each of our officers is elected by the Board of Directors and holds office until
his or her successor is duly elected and qualified or until his or her earlier
death, resignation or removal.
The Board of Directors has established Audit, Compensation and Nominating
Committees. The Audit Committee reviews the general scope of the audit conducted
by our independent auditors and matters relating to our internal control
systems. In performing its function, the Audit Committee meets separately with
representatives of our independent auditors and with representatives of senior
management. The Audit Committee is composed of Messrs. Dambra, South, Wickham
and Hardie, all of whom are independent directors.
The Compensation Committee is responsible for making recommendations to the
Board of Directors with respect to the compensation of our executive officers
and for establishing policies to deal with various compensation and employee
benefit matters. A committee of the Compensation Committee administers our stock
option plan and makes recommendations to the Board of Directors as to option
grants to our employees under such plan. The Compensation Committee is comprised
of Messrs. Wyckoff, D. G. Humphrey, South, Wickham, Dambra and Hardie, all of
whom are independent directors, and Peter G. Humphrey and W. J.
Humphrey, Jr., both of whom are officers of FII.
The Nominating Committee is responsible for nominating individuals to serve on
the Board of Directors. The Nominating Committee is comprised of Messrs.
Wyckoff, D. G. Humphrey, South, Wickham, Dambra and Hardie, all of whom are
independent directors, and Peter G. Humphrey and W. J. Humphrey, Jr., both of
whom are officers of FII.
EXECUTIVE COMPENSATION
The following table sets forth information about the compensation received by
our Chief Executive Officer and our four other most highly compensated executive
officers for the year ended December 31, 1998 (collectively, the "Named
Executive Officers").
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<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION --------------------------
------------------- OTHER ANNUAL LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION PAYOUTS COMPENSATION(1)
- --------------------------- ------ ----- ------------ ------- ---------------
<S> <C> <C> <C> <C>
Peter G. Humphrey.............. $249,956 $94,012 -- $10,453 $7,300
President & Chief Executive
Officer of FII
Jon J. Cooper.................. 135,000 52,198 -- -- 7,394
Senior Vice President of FII
and President & Chief
Executive Officer of WYCO
Thomas L. Kime................. 151,672 60,059 -- 6,552 8,100
Senior Vice President of FII
and President & Chief
Executive Officer of NBG
W.J. Humphrey III.............. 114,000 45,520 -- 4,881 6,500
Senior Vice President of FII
and President & Chief
Executive Officer of PSB
Randolph C. Brown.............. 100,000 35,890 -- 5,094 3,295
Senior Vice President of FII
and President & Chief
Executive Officer of FTB
- -------------------------
<FN>
(1) Represents matching and additional performance contributions made by us
under our 401(k) plan.
</FN>
</TABLE>
DIRECTOR COMPENSATION
We pay our directors who are not employed by us or the banks an annual retainer
of $2,500 and a separate fee for each board or committee meeting that they
attend. The fees for attending a Board meeting are $500 and the fees for
attending an Audit Committee meeting are $400 for the committee chairman and
$300 for each other member of the committee. The fees for attending a
Compensation Committee or Nominating Committee meeting are $200 for the
committee chairman and $150 for each other member of the committee. We do not
pay the directors who are employed by us or the banks any annual retainer or any
compensation for attending Board or committee meetings.
STOCK OPTION PLAN
On May ___, 1999, our shareholders approved the 1999 Employee Stock Option Plan,
under which we may issue stock options to purchase shares of our common stock to
our key employees. The employee option plan is administered by a subcommittee of
our Compensation Committee which much consist of at least two non-employee
directors (the "Option Committee"). The Option Committee is presently comprised
of Messrs. __________, ___________ and ____________. The Option Committee is
authorized under the option plan to select employees eligible for participation
in the plan, to make grants under the plan to such employees and determine the
terms and conditions of the awards under the plan. An aggregate of ________
shares of our common stock has been reserved for issuance under the employee
option plan. As of June 1, 1999, options to acquire an aggregate of ________
shares of our common stock have been granted under the plan.
Options granted under the employee option plan may be either incentive stock
options, called ISOs, or such other forms of non-qualified stock options as the
committee may determine. ISOs are intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended. The exercise
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<PAGE>
price of an ISO granted to an individual who owns shares possessing more than
10% of the total combined voting power of all classes of our stock will be at
least 110% of the fair market value of a share of our common stock on the date
of grant. The exercise price of an ISO granted to an individual other than a 10%
owner and of a non-qualified option will be at least 100% of the fair market
value of a share of our common stock on the date of grant.
Options granted under the employee option plan may be subject to vesting and
certain other restrictions at the sole discretion of the Option Committee.
Subject to certain exceptions, the right to exercise an option generally will
terminate at the earlier of (1) the first date on which the initial grantee of
such option is not employed by us for any reason other than termination without
cause, death or permanent disability, or (2) the expiration date of the option.
If the holder of an option dies or suffers a permanent disability while still
employed by us, options held by such person may be exercised by the participant,
or in the event of the participant's death, by the participant's personal
representative, any time prior to the earlier of the expiration date of the
option or the expiration of three months after the date of termination, but only
if and to the extent that the employee was entitled to exercise the option at
the date of such termination.
DEFINED BENEFIT PLAN
We maintain a defined benefit retirement plan that covers all of our full- and
part-time employees who satisfy the eligibility requirements. Employees are
eligible to participate in the plan if they have completed one year of
employment and are at least 21 years of age. Participants with five or more
years of service are entitled to annual pension benefits beginning at 62 years
of age. The amount of the retirement benefit is 1.75% of the participant's
highest average five consecutive years' compensation multiplied by the number of
years of service up to 35 years, plus 1.25% of the participant's highest average
five consecutive years' compensation for service in excess of 35 years, not to
exceed 40 years of creditable service, less 0.49% of the average of the
participant's final three years' compensation multiplied by the number of years
of service up to 35 years. If a participant terminates employment with us before
completing five years of service, such person forfeits the right to receive plan
benefits. Total plan expense charged to our operations for 1998, 1997 and 1996
was $35,000, $126,000 and 224,000, respectively, and the market value of the
assets held by the plan was approximately $13.5 million. The following table
sets forth the estimated plan benefits payable upon retirement for various
levels of compensation and years of service:
YEARS OF SERVICE
------------------------------------------------------
COMPENSATION 15 20 25 30 35
------------ -- -- -- -- --
100,000 23,962 31,949 39,937 47,924 55,912
125,000 30,525 40,699 50,874 61,049 71,224
150,000 37,087 49,449 61,812 74,174 86,537
175,000 39,712 52,949 66,187 79,424 92,662
200,000 39,712 52,949 66,187 79,424 92,662
250,000 39,712 52,949 66,187 79,424 92,662
300,000 39,712 52,949 66,187 79,424 92,662
350,000 39,712 52,949 66,187 79,424 92,662
400,000 39,712 52,949 66,187 79,424 92,662
450,000 39,712 52,949 66,187 79,424 92,662
500,000 39,712 52,949 66,187 79,424 92,662
For purposes of determining benefi ts under the plan, compensation includes
salary and bonus but cannot exceed $160,000. The benefit computation is based on
a life annuity with a five year ce rtain. The Social Security Offset (included
in the above figures) is 0.49% times the three year final average salary up to
covered compensation times the num ber of years of creditable service up to 35
years. This offset assumes a 1999 benefit for a participant of age 65. The
estimated credited years of servic e for each of the Named Executive Officers as
of December 31, 1998 was:
* Peter G. Humphrey 19.417
* Jon J. Cooper 0.750
* Thomas L. Kime 19.917
* W. J. Humphrey III 22.750
* Randolph C. Brown 6.167
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<PAGE>
401(K) PLAN
We maintain a contributory profit sharing plan pursuant to Internal Revenue Code
Section 401(k) covering substantially all employees. At least one year of
service is required to be eligible for employer-matching contributions.
Participants may contribute up to 15% of their compensation to the Plan. Each
year we determine, at our discretion, the amount of matching contributions.
Total plan expense charged to our operations for 1998, 1997 and 1996 was
$398,000, $389,000 and $400,000, respectively.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock and preferred stock as of April 16, 1999 by (1)
each of our directors and the Named Executive Officers, (2) all directors and
executive officers as a group and (3) each person who is known by us to own
beneficially 5% or more of our common stock. Unless otherwise indicated, each
person has sole voting and dispositive power over the shares indicated as owned
by such person and the address of each shareholder is the same as our address.
See "Management--Directors and Executive Officers of the Company."
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON SHARES(1)
NUMBER OF --------------------- SHARES OF PERCENTAGE SHARES OF PERCENTAGE
COMMON BEFORE AFTER SERIES A OF SERIES A SERIES B OF SERIES B
NAME OF BENEFICIAL OWNER SHARES OFFERING OFFERING PREFERRED PREFERRED PREFERRED PREFERRED
- ------------------------ ------ -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
W.J. Humphrey, Jr. 505,500 5.1% 4.7% -- -- 27,797 15.7%
Peter G. Humphrey 276,600(2) 2.8 2.6 54 2.9% 4,334(2) 2.5
Jon J. Cooper 1,000 * * -- -- -- --
Barton P. Dambra 4,000 * * -- -- 72 *
James R. Hardie 1,000 * * -- -- -- --
Donald G. Humphrey 627,100 6.3 5.8 -- -- 29,512 16.7
W.J. Humphrey, III 345,900(3) 3.5 3.2 73 4.0 5,257(3) 3.0
Thomas L. Kime 6,600 * * -- -- 18 *
H. Jack South 1,000 * * -- -- -- --
Donald I. Wickham -- -- -- -- -- -- --
James H. Wyckoff 256,600 2.6 2.4 19 1.0 5,936 3.4
Randolph C. Brown 1,000 * -- -- -- 18 *
Executive officers
and directors
as a group (12 persons) 2,026,300 20.4 18.7 146 7.9 72,944 41.3
Wyoming County Bank 650,100(4) 6.6 6.0 -- -- -- --
* Denotes less than one percent.
<FN>
(1) Based on 9,915,600 shares outstanding before the offering and 10,818,733
shares outstanding after the offering, assuming 903,133 shares are issued
in the offering.
(2) Includes 54,000 shares of common stock, 810 shares of Series B Preferred
Stock and 19 shares of Series A Preferred Stock held by Peter G. Humphrey
as custodian for Christopher G. Humphrey. Peter G. Humphrey disclaims
beneficial ownership of such shares.
(3) Includes 50,000 shares of common stock, 738 shares of Series B Preferred
Stock and 19 shares of Series A Preferred Stock held by W. J. Humphrey, III
as custodian for W.J. Humphrey, V and 49,000 shares of common stock, 702
shares of Series B Preferred Stock and 19 shares of Series A Preferred
Stock held by W. J. Humphrey, III as custodian for Jamie P. Humphrey. W. J.
Humphrey, III disclaims beneficial ownership of such shares.
(4) 450,100 shares are held by WCB as trustee under certain educational trusts
established by W. J. Humphrey, Jr. and 200,000 shares are held by WCB as
trustee under a charitable lead annuity trust established by Margaret H.
Wyckoff.
</FN>
</TABLE>
The YMCA of Batavia, the selling shareholder, presently owns 430,200 shares of
common stock that were contributed to it by certain members of the Humphrey
Family, or 4.34% of the presently outstanding shares of common stock. The YMCA
is offering all of its shares in the offering and, following the offering, will
not own any of our common stock.
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<PAGE>
CERTAIN RELATED TRANSACTIONS
Our directors, executive officers and many of our principal shareholders (i.e.,
those who own 10% or more of the common stock) and their associates are also our
customers. Such associates would include corporations, partnerships and other
organizations in which they are officers or partners or in which they and their
immediate families have at least a 5% interest. During 1998, we made loans in
the ordinary course of business to many of our directors, executive officers and
principal shareholders and their affiliates. All of these loans were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with persons unaffiliated
with us. Also, the loans did not involve more than the normal risk of
collectibility or present other unfavorable features. On December 31, 1998, the
aggregate principal amount of loans to our directors, named executive officers
and their affiliates were $809,000 and the principal amount of loans to all of
the directors and officers of FII and our banks and their affiliates were $11.6
million. Loans to directors, executive officers and principal shareholders are
subject to limitations contained in the Federal Reserve Act, which requires that
such loans satisfy certain criteria.
We expect to have such transactions or transactions on a similar basis with our
directors, executive officers and principal shareholders and their affiliates in
the future.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Our authorized capital stock consists of
* 50,000,000 shares of common stock, $.01 per share par value, of which
10,200,400 shares were issued and 9,915,600 were outstanding as of
December 31, 1998 (after giving effect to the stock split);
* 10,000 shares of Class A Preferred Stock, $100.00 per share par value,
of which there were 1,842 shares of Series A 3% Preferred Stock issued
and outstanding as of December 31, 1998; and
* 200,000 shares of Class B Preferred Stock, $100.00 per share par value,
of which 180,000 shares have been designated as Series B-1 8.48%
Preferred Stock (of which 176,734 shares were issued and outstanding as
of December 31, 1998).
The terms of any new series of preferred stock may be fixed by our Board of
Directors within certain limits set by our Certificate of Incorporation.
The following discussion of the terms and provisions of our capital stock is
qualified in its entirety by reference to our Certificate of Incorporation and
By-laws, copies of which have been filed as exhibits to the Registration
Statement of which this prospectus is a part.
COMMON STOCK
The holders of the common stock are entitled to one vote for each share of
common stock owned. Except as expressly provided by law and except for any
voting rights which may be conferred by the Board of Directors on any shares of
preferred stock issued, the holders of our preferred stock do not have the right
to vote. Holders of common stock may not cumulate their votes for the election
of directors. Holders of common stock do not have preemptive rights to acquire
any additional, unissued or treasury shares of FII, or securities of FII
convertible into or carrying a right to subscribe for or acquire shares of FII.
Holders of common stock will be entitled to receive dividends out of funds
legally available therefor, if and when properly declared by the Board of
Directors. See "Risk Factors--Our Dividends may Fluctuate" and "Supervision and
Regulation."
On the liquidation of FII, the holders of common stock are entitled to share pro
rata in any distribution of our assets after the holders of shares of preferred
stock have received the liquidation preference of their shares plus accumulated
but unpaid dividends (whether or not earned or declared), if any, and after all
of our other indebtedness has been provided for or satisfied.
PREFERRED STOCK
There are two classes of preferred stock, Class A preferred stock and Class B
preferred stock. The Certificate of Incorporation provides that both classes of
preferred stock are issuable in one or more series. There is one series of Class
A preferred stock that has been created, Series A 3% Preferred Stock, and one
class of Series B preferred stock that has been created, Series B-1 8.48%
Preferred Stock.
Holders of Series A 3% Preferred Stock are entitled to receive an annual
dividend of $3.00 per share, which is cumulative and payable quarterly. Holders
of Series A 3% Preferred Stock have no pre-emptive right in, or right to
purchase or subscribe for, any additional shares of FII stock and have no voting
rights. Dividend or dissolution payments to the Class A shareholders must be
declared and paid, or set apart for payment, before any dividends or dissolution
payments can be declared and paid, or set apart for payment, to the holders of
Class B preferred stock or common stock. The Series A 3% Preferred Stock is not
convertible into any other FII security.
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<PAGE>
Holders of Series B-1 8.48% Preferred Stock are entitled to receive an annual
dividend of $8.48 per share, which is cumulative and payable quarterly. Holders
of Series B-1 8.48% Preferred Stock have no pre-emptive right in, or right to
purchase or subscribe for, any additional shares of FII stock and have no voting
rights. Accumulated dividends on the Series B-1 8.48% Preferred Stock do not
bear interest, and the Series B-1 8.48% Preferred Stock is not subject to
redemption. Dividend or dissolution payments to the Class B shareholders must be
declared and paid, or set apart for payment, before any dividends or dissolution
payments are declared and paid, or set apart for payment, to the holders of
common stock. The Series B-1 8.48% Preferred Stock is not convertible into any
other FII security.
The Board of Directors of FII may, in the future, designate additional series of
preferred stock, and to fix the relative rights, preferences and limitations of
each such series. The unissued shares of Series A 3% preferred stock, Series B-1
8.48% Preferred Stock and any new series of preferred stock designated by the
Board of Directors may be issued by the Board of Directors in the future.
NEW YORK LAW AND CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BY-LAWS
Certain provisions of New York law, our Certificate of Incorporation and our
By-laws could make more difficult the acquisition of FII by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions are intended to discourage certain types of coercive
takeover practices and inadequate takeover bids. This also encourages persons
seeking to acquire control of us to negotiate with us first.
The following discussion is a summary of certain material provisions of our
Certificate of Incorporation and our By-laws, copies of which are filed as
exhibits to the Registration Statement of which this prospectus is a part.
Classified Board of Directors. Under our By-laws, the Board of Directors is
classified into three classes, with the directors being elected for staggered,
three-year terms. The classification of our Board of Directors will have the
effect of making it more difficult to change the composition of the Board of
Directors, because at least two annual meetings of the shareholders would be
required to change the control of the Board of Directors rather than one. In
addition, the By-laws provide that directors may be removed by the shareholders
only for cause and that vacancies on the Board of Directors may be filled by the
remaining directors.
Advance Notice of Shareholder Proposals and Nominations. Our By-laws establish
an advance notice procedure for shareholders to make nominations of candidates
for election as directors or bring other business before any meeting of our
shareholders. The shareholder notice procedure provides that only persons who
are nominated by, or at the direction of, the Board, or by a shareholder who has
given timely written notice prior to the meeting at which directors are to be
elected, will be eligible for election as directors and that, at a shareholders'
meeting, only such business may be conducted as has been brought before the
meeting by, or at the direction of, the Board of Directors or by a shareholder
who has given timely written notice of such shareholder's intention to bring
such business before such meeting.
Under the shareholder notice procedure, for notice of shareholder nominations or
other business to be made at a shareholders' meeting to be timely, such notice
must be received by us not less than 60 days prior to the meeting.
A shareholder's notice to us proposing to nominate a person for election as a
director or proposing other business must contain certain information specified
in the By-laws, including the identity and address of the nominating
shareholder, a representation that the shareholder is a record holder of our
stock entitled to vote at the meeting and information regarding each proposed
nominee or each proposed matter of business that would be required under the
federal securities laws to be included in a proxy statement soliciting proxies
for the proposed nominee or the proposed matter of business.
The shareholder notice procedure may have the effect of precluding a contest for
the election of directors or the consideration of shareholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to us
and our shareholders.
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<PAGE>
Special Meetings of Shareholders. Our Certificate of Incorporation provides that
special meetings of shareholders can be called by a majority of the Board of
Directors, the Chairman of the Board, the President or the holders of at least
50% of the outstanding shares of stock entitled to vote at the meeting.
No Action by Written Consent Without Unanimous Written Consent. Under the New
York Business Corporation Law, no action required or permitted to be taken at an
annual or special meeting of shareholders may be taken by written consent in
lieu of a meeting of shareholders without the unanimous written consent of all
shareholders unless the certificate of incorporation specifically permits action
by less than unanimous consent. Our Certificate of Incorporation does not
contain such a provision.
Amendment of By-laws. Our By-laws provide that they may be amended only by the
Board of Directors. Shareholders do not have the power to amend our By-laws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is expected to be
ChaseMellon Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
When the offering is completed, FII will have a total of __________ shares of
common stock outstanding. The __________ shares offered by this prospectus will
be freely tradeable unless they are purchased by "affiliates" of FII, as defined
in Rule 144 under the Securities Act. The remaining __________ shares are
"restricted," which means they were originally sold in certain types of
offerings that were not subject to a registration statement filed with the SEC.
These restricted shares may be resold only through registration under the
Securities Act of 1933 or under an available exemption from registration, such
as provided through Rule 144. __________ of the restricted shares may be sold in
__________ and the remainder may be sold in __________.
In addition, __________ shares are issuable upon exercise of options and
warrants. If any options and warrants are exercised, the shares issued upon
exercise will also be restricted, but may be sold under Rule 144 after the
shares have been held for one year. Sales under Rule 144 may be subject to
certain volume limitations and other conditions.
The holders of __________ shares of common stock have agreed to a 180-day
"lock-up" with respect to these shares. This generally means that they cannot
sell these shares during the 180-day period following the date of this
prospectus. See "Underwriting" for additional details. After the 180-day lock-up
period, these shares may be sold in accordance with applicable securities laws,
including Rule 144.
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<PAGE>
UNDERWRITING
FII and the selling shareholder have entered into an underwriting agreement with
the underwriters named below. CIBC Oppenheimer Corp. and Keefe, Bruyette &
Woods, Inc. are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
UNDERWRITER NUMBER OF SHARES
----------- ----------------
CIBC Oppenheimer Corp........................................
Keefe, Bruyette & Woods, Inc.................................
----------------
Total...................................................
================
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised FII that the underwriters propose to offer the
shares directly to the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives may offer some
of the shares to certain securities dealers at such price less a concession of
$____ per share. The underwriters may also allow, and such dealers may reallow,
a concession not in excess of $____ per share to certain other dealers. After
the shares are released for sale to the public, the representatives may change
the offering price and other selling terms at various times.
FII has granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 200,000 additional shares from FII to
cover over-allotments. If the underwriters exercise all or part of this option,
they will purchase shares covered by the option at the initial public offering
price that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to public will be
$____ million and the total proceeds to FII will be $____ million. The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the foregoing
table.
The following table provides information regarding the amount of the discount to
be paid to the underwriters by FII and the selling shareholder:
<TABLE>
<CAPTION>
TOTAL WITHOUT EXERCISE OF TOTAL WITH FULL EXERCISE
PER SHARE OVER-ALLOTMENT OPTION OF OVER-ALLOTMENT OPTION
--------- --------------------- ------------------------
<S> <C> <C> <C>
FII............................... $______ $__________ $__________
Selling shareholder............... $______ $__________ $__________
Total......................... $__________ $__________
</TABLE>
FII and the selling shareholder estimate that their portions of the total
expenses of the offering, excluding the underwriting discount, will be
approximately $________ and $________, respectively.
FII and the selling shareholder have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
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<PAGE>
FII, its officers and directors and certain other shareholders have agreed to a
180-day "lock up" with respect to _________ shares of common stock and certain
other FII securities that they beneficially own, including securities that are
convertible into shares of common stock and securities that are exchangeable or
exercisable for shares of common stock. This means that, subject to certain
exceptions, for a period of 180 days following the date of this prospectus, FII
and such persons may not offer, sell, pledge or otherwise dispose of these FII
securities without the prior written consent of CIBC Oppenheimer Corp.
The representatives have informed FII that they do not expect discretionary
sales by the underwriters to exceed 5% of the shares offered by this prospectus.
The underwriters have reserved for sale up to 10% of the shares offered by this
prospectus for employees, directors and certain other persons associated with
FII. These reserved shares will be sold at the initial public offering price
that appears on the cover page of this prospectus. The number of shares
available for sale to the general public in the offering will be reduced to the
extent reserved shares are purchased by such persons. The underwriters will
offer to the general public, on the same terms as other shares offered by this
prospectus, any reserved shares that are not purchased by such persons.
There is no established trading market for the shares. The offering price for
the shares has been determined by FII and the representatives, based on the
following factors: prevailing market and general economic conditions; the market
capitalizations, trading histories and stages of development of other traded
companies that FII and the representatives believed to be comparable to FII;
FII's results of operations in recent periods; FII's current financial position;
estimates of FII's business potential; the present state of FII's development;
and the availability for sale in the market of a significant number of shares of
common stock.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
* Stabilizing transactions -- The representatives may make bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
shares, so long as stabilizing bids do not exceed a specified maximum.
* Over-allotments and syndicate covering transactions -- The underwriters
may create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created in
connection with the offering, the representatives may engage in syndicate
covering transactions by purchasing shares in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option.
* Penalty bids -- If the representatives purchase shares in the open market
in a stabilizing transaction or syndicate covering transaction, they may reclaim
a selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither FII nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time.
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LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon by
Nixon, Hargrave, Devans & Doyle LLP, Rochester, New York. Certain legal matters
with respect to the common stock offered hereby will be passed upon for the
underwriters by Gibson, Dunn & Crutcher LLP, New York, New York.
EXPERTS
The consolidated financial statements of FII and subsidiaries as of December 31,
1998 and 1997 and for each of the years in the three-year period ended December
31, 1998 have been included in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as "experts" in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have not previously been subject to the reporting requirements of the
Securities Exchange Act of 1934. We have filed with the SEC a registration
statement on Form S-1 under the Securities Act with respect to the offer and
sale of common stock pursuant to this prospectus. This prospectus, filed as a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement or the exhibits and schedules thereto as
permitted by the rules and regulations of the SEC. Statements made in this
prospectus concerning the contents of any contract, agreement or other document
filed as an exhibit to the Registration Statement are summaries of the terms of
such contracts, agreements or documents and are not necessarily complete.
Reference is made to each such exhibit for a more complete description of the
matters involved and such statements shall be deemed qualified in their entirety
by such reference. The Registration Statement and the exhibits and schedules
thereto filed with the SEC may be inspected, without charge, and copies may be
obtained at prescribed rates, at the public reference facility maintained by the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the SEC located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60621-2511. The Registration Statement and other information
filed by us with the SEC are also available at the SEC's World Wide Web site on
the internet at http://www.sec.gov.
As a result of the offering, FII and its shareholders will become subject to the
proxy solicitation rules, annual and periodic reporting requirements,
restrictions of stock purchases and sales by affiliates and certain other
requirements of the Exchange Act. We will furnish our shareholders with annual
reports containing audited financial statements certified by independent
auditors and quarterly reports containing unaudited financial statements for the
first three quarters of each fiscal year.
68
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report.................................................F-2
Consolidated Statements of Financial Condition
as of December 31, 1998 and 1997.........................................F-3
Consolidated Statements of Income for the years
ended December 31, 1998, 1997 and 1996...................................F-4
Consolidated Statements of Changes in Shareholders'
Equity and Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996........................................F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996...................................F-6
Notes to Consolidated Financial Statements...................................F-7
All schedules are omitted because they are not required or applicable, or the
required information is shown in the consolidated financial statements or notes
thereto.
F-1
<PAGE>
When the Company files its amended and restated Certificate of Incorporation and
completes a stock split as described in note 2 of the notes to the consolidated
financial statements of Financial Institutions, Inc. and subsidiaries, we will
be in a position to issue the following report.
/s/ KPMG LLP
Buffalo, New York
April 19, 1999
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, 1998 and
1997 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, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Buffalo, New York
January 29, 1999, except for note 2, which is as of June _____, 1999
F-2
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
(Dollars in thousands, except share amounts)
ASSETS
Cash, due from banks and interest-bearing deposits $26,365 $39,775
Federal funds sold 16,478 400
Securities available for sale, at fair value 157,022 110,123
Securities held to maturity 91,016 99,084
Loans 655,427 602,477
Allowance for loan losses (9,570) (8,145)
-------- -------
Loans, net 645,857 594,332
Premises and equipment, net 18,081 16,203
Intangible assets 3,957 4,796
Other assets 17,409 15,799
-------- --------
Total assets $976,185 $880,512
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $128,216 $114,952
Savings, money market and interest-bearing
checking 273,630 248,980
Certificates of Deposit 448,609 403,794
------- -------
Total deposits 850,455 767,726
Accrued expenses and other liabilities 15,290 13,877
Short-term borrowings 5,362 8,849
Long-term borrowings 8,500 3,217
------- -------
Total liabilities 879,607 793,669
------- -------
Shareholders' equity:
3% cumulative preferred stock, $100 par value,
authorized 10,000 shares, issued and
outstanding 1,842 shares in 1998 and
1,847 shares in 1997 184 185
8.48% cumulative preferred stock, $100 par
value, authorized 200,000 shares, issued
and outstanding 176,734 shares in 1998
and 177,427 shares in 1997 17,673 17,743
Common stock, $ 0.01 par value, authorized
50,000,000 shares, issued 10,200,400 shares 102 102
Additional paid-in capital 2,837 2,787
Retained earnings 75,167 65,661
Accumulated other comprehensive income 1,141 749
Treasury stock - common, at cost -
284,800 shares in 1998 and 271,900
shares in 1997 (526) (384)
-------- --------
Total shareholders' equity 96,578 86,843
-------- --------
Total liabilities and shareholders' equity $976,185 $880,512
======== =======
F-3
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
(Dollars in thousands, except
per share amounts)
Interest income:
Loans $59,090 $54,730 $49,315
Securities 12,938 11,650 11,064
Other 842 788 813
------ ------ ------
Total interest income 72,870 67,168 61,192
------ ------ ------
Interest expense:
Deposits 30,159 27,193 24,292
Borrowings 799 658 222
------ ------ ------
Total interest expense 30,958 27,851 24,514
------ ------ ------
Net interest income 41,912 39,317 36,678
Provision for loan losses 2,732 2,829 1,740
------ ------ ------
Net interest income after
provision for loan losses 39,180 36,488 34,938
------ ------ ------
Noninterest income:
Service charges on deposits 3,234 2,706 2,684
Loan servicing fees 1,190 1,137 925
Other 1,957 1,890 1,556
------ ------ ------
Total noninterest income 6,381 5,733 5,165
------ ------ ------
Noninterest expense:
Salaries and employee benefits 13,092 11,713 10,740
Occupancy and equipment 3,855 3,809 2,987
Supplies and postage 1,363 1,211 1,187
Amortization of intangibles 839 839 839
Professional fees 809 328 273
Other 4,644 4,184 3,770
------ ------ ------
Total noninterest expense 24,602 22,084 19,796
------ ------ ------
Income before income taxes 20,959 20,137 20,307
Income taxes 7,354 7,295 7,232
------ ------ ------
Net income 13,605 12,842 13,075
Preferred stock dividends 1,506 1,513 1,522
------ ------ ------
Net income available to
common shareholders $12,099 $ 11,329 $ 11,553
====== ====== ======
Net income per common share:
Basic $ 1.22 $ 1.14 $ 1.16
==== ==== ====
Diluted $ 1.22 $ 1.14 $ 1.16
==== ==== ====
F-4
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ACCUMULATED
ADDITIONAL OTHER TOTAL
3% 8.48% PAID- COMPRE- SHARE-
PREFERRED PREFERRED COMMON IN RETAINED HENSIVE TREASURY HOLDERS'
STOCK STOCK STOCK CAPITAL EARNINGS INCOME STOCK EQUITY
----- ----- ----- ------- -------- ------ ----- ------
(Dollars in thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1995 $194 $17,881 $102 $2,760 $46,900 $480 ($316) $68,001
Purchase of 18 shares of 3% preferred stock (2) -- -- 1 -- -- -- (1)
Purchase of 207 shares of 8.48% preferred stock -- (21) -- -- -- -- -- (21)
Purchase of 12,500 shares of common stock -- -- -- -- -- -- (53) (53)
Comprehensive income:
Net income -- -- -- -- 13,075 -- -- 13,075
Unrealized loss on securities
available for sale, net -- -- -- -- -- (288) -- (288)
-------
Total comprehensive income 12,787
------
Cash dividends declared:
3% Preferred - $3.00 per share -- -- -- -- (6) -- -- (6)
8.48% Preferred - $8.48 per share -- -- -- -- (1,516) -- -- (1,516)
Common - $0.20 per share -- -- -- -- (1,937) -- -- (1,937)
--- --- --- --- ------- --- --- -------
BALANCE - DECEMBER 31, 1996 192 17,860 102 2,761 56,516 192 (369) 77,254
Purchase of 72 shares of 3% preferred stock (7) -- -- 4 -- -- -- (3)
Purchase of 1,176 shares of 8.48% preferred stock -- (117) -- (5) -- -- -- (122)
Purchase of 5,200 shares of common stock -- -- -- -- -- -- (23) (23)
Sale of 6,000 shares of treasury stock -- -- -- 27 -- -- 8 35
Comprehensive income:
Net income -- -- -- -- 12,842 -- -- 12,842
Unrealized gain on securities
available for sale, net -- -- -- -- -- 557 -- 557
------
Total comprehensive income 13,399
------
Cash dividends declared:
3% Preferred - $3.00 per share -- -- -- -- (6) -- -- (6)
8.48% Preferred - $8.48 per share -- -- -- -- (1,507) -- -- (1,507)
Common - $0.22 per share -- -- -- -- (2,184) -- -- (2,184)
--- --- --- --- ------- --- --- -------
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 -- -- -- -- -- 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
=== ====== === ===== ====== ===== === ======
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $13,605 $12,842 $13,075
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,117 2,798 2,337
Provision for loan losses 2,732 2,829 1,740
Deferred income tax benefit (670) (533) (203)
Gain on sale of loans and premises and equipment (181) (353) (245)
Minority interest in net income of subsidiary banks 68 68 73
Increase in other assets (1,210) (1,536) (1,027)
Increase in accrued expenses and other liabilities 1,231 2,367 455
------ ------ ------
Net cash provided by operating activities 18,692 18,482 16,205
------ ------ ------
Cash flows from investing activities:
Purchase of securities:
Available for sale (141,300) (61,916) (46,913)
Held to maturity (46,008) (33,693) (45,371)
Proceeds from maturities of securities:
Available for sale 94,841 36,467 34,898
Held to maturity 53,766 40,505 39,287
Proceeds from sales of securities available for sale -- -- 12,968
Net increase in loans (54,025) (51,743) (71,854)
Purchase of premises and equipment, net (3,673) (4,172) (3,528)
------ ------ ------
Net cash used in investing activities (96,399) (74,552) (80,513)
------ ------ ------
Cash flows from financing activities:
Net increase in deposits 82,729 60,023 67,466
Increase (decrease) in short-term borrowings, net (3,487) 4,959 3,000
Proceeds from long-term borrowings 5,344 1,314 --
Repayment of long-term borrowings (61) (21) --
Repurchase of preferred and common shares, net (163) (113) (75)
Dividends paid (3,987) (3,750) (3,432)
------ ------ ------
Net cash provided by financing activities 80,375 62,412 66,959
------ ------ ------
Net increase in cash and cash equivalents 2,668 6,342 2,651
Cash and cash equivalents at the beginning of the year 40,175 33,833 31,182
------ ------ ------
Cash and cash equivalents at the end of the year $42,843 $40,175 $33,833
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during year for:
Interest 29,920 25,782 24,512
Income taxes $8,431 $7,462 $7,454
===== ===== =====
</TABLE>
F-6
<PAGE>
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
Western New York State and are subject to regulation by certain federal and
state banking agencies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of FII, its banking
subsidiaries, Wyoming County Bank (99.65%-owned) ("WYCO"), The National Bank of
Geneva (99.10%-owned) ("NBG"), The Pavilion State Bank (100%-owned) ("PSB"), and
First Tier Bank & Trust (100%-owned) ("FTB"), and Financial Institutions
Services, Inc., a wholly-owned nonbanking subsidiary. 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 reported as a component of
accumulated other comprehensive income in shareholders' equity, net of the
related deferred income tax effect until realized. Transfers of securities
between categories are recorded at fair value at the date of transfer.
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. Gains or losses on
dispositions 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 valued 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 period of time past due, reasonable
doubt exists with respect to the collectibility of interest. Income is
subsequently recognized to the extent amounts are collected and the principal
balance is expected to be recovered.
The Company services residential mortgage loans for the Federal Home Loan
Mortgage Corporation (Freddie Mac). 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.
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 loan
losses. The adequacy of the allowance is determined by management's periodic
evaluation of the loan portfolio based on such factors as: current economic
conditions; the current financial condition of the borrowers; the economic
environment in which they operate; any delinquency in payments; and the value of
any collateral held. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses and may require additions to the allowance based on
their judgments about information available to them at the time of their
examinations.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts of principal
and interest under the original terms of the agreement. Accordingly, the Company
measures certain impaired commercial 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
F-7
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
include commercial and agricultural loans less than $100,000, all residential
mortgages, home equity and consumer loans that are collectively evaluated for
impairment. The Company accounts for troubled debt restructurings involving a
modification of terms at fair value as of the date of the restructuring.
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 amount, which is carried at cost, is equal to the
greater of 5% of the outstanding advance balance or 1% of the aggregate
outstanding 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 over 10 years on the
straight-line method. Intangible assets are periodically reviewed for possible
impairment or when events or changed circumstances may affect the underlying
basis of the assets.
OTHER REAL ESTATE
Other real estate owned includes property acquired through, or in lieu of,
formal foreclosure. Write downs from cost to estimated fair value at the time of
foreclosure are charged to the allowance for loan losses. After transfer, the
property is carried at the lower of cost or fair value, less estimated selling
expenses. Adjustments to the carrying value of such properties that result from
subsequent declines in value are charged to income in the period in which the
declines occur.
PENSION PLAN
The Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Post Retirement Benefits" in 1998. This statement revised employers'
disclosures about pension and other post retirement benefit plans. It does not
change the measurement or the recognition of these plans. The adoption of the
statement did not impact its financial position or results of operations.
NET INCOME PER COMMON SHARE
Basic net income per common share, after giving effect to preferred stock
dividends, has been computed using weighted average common shares outstanding.
The Company has no common stock equivalents and therefore, diluted net income
per share is equivalent to basic net income per share.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company does not engage in the use of derivative financial instruments and
the Company's only 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.
CASH EQUIVALENTS
For purposes of the statement of cash flows, cash, due from banks,
interest-bearing deposits, and federal funds sold are considered cash
equivalents.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components. Comprehensive
income, presented in the consolidated statement of shareholders' equity and
comprehensive income, consists of net income and net unrealized holding gains
and losses on securities available for sale, net of both the related tax effect
and the reclassification adjustment for gains included in net income. Prior year
financial statements have been reclassified to conform to the requirements of
this statement.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 requires public companies to report financial and other information
about key revenue-producing segments of the entity for which such information is
available and is utilized by the chief operating decision maker. Specific
information to be reported for individual segments includes profit or loss,
certain specific
F-8
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
revenue and expense items and total assets. A reconciliation of segment
financial information to amounts reported in the financial statements is also
provided. As a community-oriented financial institution, substantially all of
our operations involve the delivery of loan and deposit products to customers.
Management, through its four individual autonomous banks, makes operating
decisions and assesses performance based on an ongoing review of these community
banking operations. Accordingly, the four individual banks constitute operating
segments for financial reporting purposes. The statement was effective for our
year-end 1998 reporting and did not impact our financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires the Company to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for gains and losses resulting from
changes in fair value of the derivative instrument depends on the intended use
of the derivative and the type of risk being hedged. This statement is effective
for fiscal years beginning after June 15, 1999, although earlier adoption is
permitted. Based upon current activities, the adoption of this statement will
not have an effect on the Company's financial position or results of operations.
SFAS No. 133 also permits certain reclassification of securities to the
available for sale category from the held to maturity category. The Company has
no current intention to reclassify any securities pursuant to SFAS No 133.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" which amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities." This statement conforms the subsequent accounting
for securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the accounting for such securities by nonmortgage
banking enterprises. This statement is effective beginning on January 1, 1999,
and is not expected to have any impact on the Company's financial position or
results of operations as the Company does not currently securitize mortgage
loans.
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. Actual results could differ
from those estimates.
2. INITIAL PUBLIC OFFERING
On April 16, 1999, the Company's Board of Directors authorized the filing of a
registration statement for the initial public offering of its common stock. On
May ___, 1999, the Board of Directors approved an increase in the authorized
number of shares of common stock to 50,000,000, a [100]-for-one stock split and
a corresponding reduction in the par value of common stock from $1.00 to $0.01
per share. On May __, 1999 the Company's shareholders approved an amended and
restated Certificate of Incorporation to effect this recapitalization which was
filed and became effective on June __, 1999. All share and per share amounts
included in the consolidated financial statements retroactively reflect the
stock split.
3. SECURITIES
The amortized cost and fair value of debt and equity securities at December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) GROSS UNREALIZED
AMORTIZED ------------------ FAIR
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available for sale:
U. S. Treasury and agency $117,035 $ 712 $ 85 $117,662
Mortgage-backed securities 23,357 131 24 23,464
State and municipal obligations 9,028 181 -- 9,209
Corporate bonds 2,745 51 -- 2,796
Equity securities 2,925 966 -- 3,891
------- ----- --- -------
Total securities available for sale $155,090 $2,041 $109 $157,022
======= ===== === =======
Securities held to maturity:
U.S. Treasury and agency 12,476 128 -- 12,604
State and municipal obligations 78,540 1,316 32 79,824
------ ----- -- ------
Total securities held to maturity $91,016 $1,444 $32 $92,428
====== ===== == ======
</TABLE>
F-9
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(Dollars in thousands) GROSS UNREALIZED
AMORTIZED ---------------- FAIR
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and agency $84,617 $ 366 $67 $84,916
Mortgage-backed securities 17,212 139 40 17,311
State and municipal obligations 4,321 42 1 4,362
Equity securities 2,704 830 - 3,534
------- ----- --- -------
Total securities available for sale $108,854 $1,377 $108 $110,123
======= ===== === =======
Securities held to maturity:
U.S. Treasury and agency 42,081 85 44 42,122
State and municipal obligations 57,003 809 31 57,781
------ --- -- ------
Total securities held to maturity $99,084 $894 $75 $99,903
====== === == ======
</TABLE>
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------ ----------------
AMORTIZED FAIR AMORTIZED FAIR
(Dollars in thousands) COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 7,103 $ 7,185 $21,815 $21,917
Due after one year through five years 85,716 86,287 57,287 58,151
Due after five years through ten years 53,057 53,340 11,386 11,807
Due after ten years 6,289 6,319 528 553
------- ------- ------ ------
$152,165 $153,131 $91,016 $92,428
======= ======= ====== ======
</TABLE>
The Company did not sell any securities in 1998 or 1997. Proceeds from the sale
of securities available for sale during 1996 were $12,968,000, with gross gains
of $27,000 and gross losses of $34,000 realized on those sales. No securities
held to maturity were sold in 1998, 1997 and 1996. The reclassification
adjustment for net losses of sales of securities included in net income, net of
tax, was $5,000, which adjusted the change in unrealized loss on securities
available for sale for the year ended December 31, 1996 to $(288,000). The
Company had no reclassification adjustment in 1998 or 1997.
Securities carried at approximately $204,586,000 and $173,556,000 at December
31, 1998 and 1997, respectively, were pledged to secure public funds on deposit,
repurchase agreements and for other purposes as required by law.
4. LOANS
Loans outstanding at December 31, 1998 and 1997 are summarized as follows:
(Dollars in thousands) 1998 1997
---- ----
Commercial $117,750 $105,811
Commercial real estate 106,948 99,273
Agricultural 123,754 107,546
Residential real estate 182,177 170,736
Consumer 125,198 119,506
------- -------
Loans, gross 655,827 602,872
Net deferred fees (400) (395)
Allowance for loan losses (9,570) (8,145)
-------- -------
Loans, net $645,857 $594,332
======= =======
Loans serviced for others, amounting to $177,797,000 and $153,218,000 at
December 31, 1998 and 1997, respectively, are not included in the consolidated
statements of financial condition. Proceeds from the sale of loans were
$55,725,000, $45,525,000 and $36,498,000 in 1998, 1997 and 1996, respectively.
Net gain on the sale of loans was $232,000, $341,000 and $140,000 in 1998, 1997
and 1996, respectively.
Loans outstanding to certain officers, directors or companies in which they have
10% or more beneficial ownership approximated $11,562,000 and $11,351,000 at
December 31, 1998 and 1997, 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.
F-10
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments are primarily commitments to extend credit. The
instruments involve, to varying degrees, elements of credit and interest rate
risk and at December 31, 1998 and 1997 are not reflected in the consolidated
statement of financial condition. Commitments outstanding under unused lines of
credit, unadvanced construction loans and to originate loans at December 31,
1998 and 1997 amounted to $107,995,000 and $106,755,000, respectively.
Outstanding commitments on letters of credit at December 31, 1998 and 1997
amounted to $3,640,000 and $4,488,000, respectively. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Generally, commitments to extend credit, if exercised, will
represent loans secured by collateral. Commitments to sell loans were $6,109,000
and $1,023,000 at December 31, 1998 and 1997, 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 mortgages 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 U.S. government-sponsored agencies (FHLMC and FHA).
As of December 31, 1998, the Company had no significant concentration of credit
risk in the loan portfolio outside of the natural geographic concentration
pertaining to the communities that the Company serves, or significant exposure
to highly leveraged transactions. There are no foreign credits in the loan
portfolio.
5. ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses for the years ended
December 31, 1998, 1997 and 1996 follows:
YEARS ENDED DECEMBER 31
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Balance at beginning of year $8,145 $7,129 $6,183
Provision for loan losses 2,732 2,829 1,740
Charge-offs (1,672) (1,997) (932)
Recoveries 365 184 138
------ ------ -----
Balance at end of year $9,570 $ 8,145 $7,129
===== ===== =====
Nonperforming assets at December 31, 1998 and 1997 are as follows:
(Dollars in thousands) 1998 1997
---- ----
Nonaccrual loans $5,741 $7,043
Accruing loans 90 or more days delinquent 360 433
Other real estate owned 2,084 2,309
----- -----
Total nonperforming assets 8,185 9,785
Less: government guaranteed portion
of nonperforming loans 1,421 1,428
----- ------
Total nonperforming assets, net of
government guaranteed portion $6,764 $8,357
===== =====
Nonperforming assets as a percent of loans and
other real estate owned:
Total 1.24% 1.62%
==== ====
Net of government guaranteed portion 1.03% 1.38%
==== ====
F-11
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects loans that are considered impaired at or for the
year ended December 31:
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Impaired loans with an allowance $4,863 $5,206 $3,855
Impaired loans without an allowance 203 237 2,931
------ ------ ------
Total impaired loans $5,066 $5,443 $6,786
===== ===== =====
Allowance for losses on impaired loans $ 941 $ 954 $ 673
===== ==== ====
Average balance of impaired loans
during the year $8,111 $7,184 $6,023
===== ===== =====
Interest income recognized
on impaired loans $ 246 $ 369 $ 483
===== ==== ====
6. PREMISES AND EQUIPMENT
Premises and Equipment at December 31, 1998 and 1997 are summarized as follows:
(Dollars in thousands) 1998 1997
---- ----
Land $ 1,621 $ 1,666
Buildings 13,902 12,429
Furniture and equipment 11,056 9,438
Leasehold improvements 927 925
Construction-in-progress 863 640
------- ------
28,369 25,098
Accumulated depreciation and amortization (10,288) (8,895)
------- ------
Premises and equipment, net $18,081 $16,203
====== ======
7. DEPOSITS
At December 31, 1998, scheduled maturities of certificates of deposit are as
follows:
(Dollars in thousands)
Mature in year ending December 31
1999 $372,963
2000 60,157
2001 7,269
2002 4,106
2003 4,114
--------
Total time deposits $448,609
========
Certificates of deposit include $171,615,000 and $141,979,000 of certificates of
deposit of $100,000 or more at December 31, 1998 and 1997, respectively.
Interest expense on these deposits amounted to $8,928,000 in 1998, $7,551,000 in
1997 and $5,632,000 in 1996.
8. BORROWINGS
Short-term borrowings at or for the year ended December 31 are summarized as
follows:
(Dollars in thousands) 1998 1997
---- ----
Repurchase agreements $5,362 $3,849
FHLB advances -- 5,000
----- -----
Total $5,362 $8,849
===== =====
Average rate at year-end 4.33% 5.27%
==== ====
Average rate during year 5.02% 5.46%
==== ====
Short-term borrowings generally mature within 90 days. Securities sold under
repurchase agreements of $5,362,000 and $3,849,000 at December 31, 1998 and
1997, respectively, are secured by U.S. Treasury and agency securities. The
maximum amount of outstanding repurchase agreements at any month end was
$6,547,000 and $2,173,000 for
F-12
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the years ended December 31, 1998 and 1997, respectively. The average amount of
outstanding repurchase agreements was $6,900,000 and $1,627,000 for the years
ended December 31, 1998 and 1997, respectively.
The Company has approximately $43,300,000 of remaining credit available under a
line of credit with the FHLB at December 31, 1998 which is collateralized by
FHLB stock and real estate mortgage loans.
Long-term borrowings at December 31, 1998 and 1997 are summarized at follows:
(Dollars in thousands) 1998 1997
---- ----
Federal Home Loan Bank advances $6,617 $1,314
10% notes 1,739 1,739
Other 144 164
---- ----
Total $8,500 $3,217
===== =====
Advances payable to the FHLB are collateralized by FHLB stock and real estate
mortgage loans. The advances mature from 1999 through 2008 and have a fixed
interest rate with a weighted average rate of 5.77% as of December 31, 1998. The
Company issued $1,739,000 of 10% unsecured notes to former shareholders of FTB
due March 31, 2000 with interest payable quarterly. Other debt at December 31,
1998 and 1997 includes mortgage notes which mature from 1999 through 2005 and
bear interest at a fixed average rate of 3.76%. Long-term borrowings have
aggregate maturities for the five years 1999 through 2003 as follows: $73,000 in
1999; $2,816,000 in 2000; $1,081,000 in 2001; $86,000 in 2002; and $88,000 in
2003.
9. INCOME TAXES
Total income taxes for the years ended December 31, 1998, 1997 and 1996 were
allocated as follows:
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Income from operations $7,354 $7,295 $7,232
Shareholders' equity, for change in
unrealized gain on securities
available for sale 273 385 (201)
--- --- ----
$7,627 $7,680 $7,031
===== ===== =====
Income tax expense (benefit) from operations in 1998, 1997 and 1996 is comprised
of:
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Current:
Federal $6,339 $6,187 $5,814
State 1,685 1,641 1,621
----- ----- -----
Total current 8,024 7,828 7,435
----- ----- -----
Deferred:
Federal (524) (420) (155)
State (146) (113) (48)
---- ---- ---
Total deferred (670) (533) (203)
----- ----- -----
Total income taxes $7,354 $7,295 $7,232
===== ===== =====
F-13
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The actual and statutory tax rates on operations differ as follows:
1998 1997 1996
---- ---- ----
Statutory rate 35.0% 35.0% 34.8%
Increase (decrease) resulting from:
Tax-exempt interest income (5.6) (4.8) (4.9)
State taxes, net of federal
income tax benefit 4.8 4.9 5.1
Other 0.9 1.1 0.6
---- ---- ----
Actual rate 35.1% 36.2% 35.6%
==== ==== ====
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred tax assets and liabilities at December 31, 1998,
1997 and 1996 included the following:
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Deferred tax assets:
Allowance for loan losses $3,808 $3,208 $2,764
Deferred loan origination fees 163 161 165
Core deposit intangible 431 337 243
Interest on nonaccrual loans 372 16 16
Other 134 99 158
---- --- ----
Total gross deferred tax assets 4,908 3,821 3,346
----- ----- -----
Deferred tax liabilities:
Depreciation and amortization of
premises and equipment 592 490 495
Accrued pension costs 1,331 1,097 1,108
Unrealized gains on securities
available for sale 791 518 133
Other 162 81 121
---- --- ----
Total gross deferred tax 2,876 2,186 1,857
liabilities ----- ----- -----
Net deferred tax asset,
included in other assets $2,032 $1,635 $1,489
===== ===== =====
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, 1998.
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 1998, 1997 and 1996 using the
most recent actuarial data measured at September 30, 1998, 1997 and 1996:
F-14
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Change in benefit obligation:
Benefit obligation at
beginning of year $ (8,913) $(7,858) $(7,847)
Service cost (543) (463) (481)
Interest cost (653) (613) (575)
Actuarial gain/(loss) (1,389) (609) 578
Benefits paid 439 530 373
Plan expenses 112 100 94
--- --- ---
Benefit obligation at
end of year (10,947) (8,913) (7,858)
------- ------ ------
Change in plans assets:
Fair value of plan assets at
beginning of year 13,395 10,956 9,489
Actual return on plan assets 594 2,424 1,291
Employer contribution 70 646 643
Plan expenses (111) (101) (94)
Benefits paid (439) (530) (373)
Fair value of plan assets at ----- ---- -----
end of year 13,509 13,395 10,956
------ ------ ------
Funded status (deficit) 2,562 4,482 3,098
Unamortized net (asset)
obligation at transition (293) (331) (370)
Unrecognized net (gain)/loss
subsequent to transition 455 (1,460) (554)
Unamortized prior service cost (62) (64) (67)
----- ----- -----
Prepaid benefit cost $2,662 $2,627 $ 2,107
===== ===== ======
Pension costs consist of the following components for the years ended December
31, 1998, 1997 and 1996:
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Service cost $ 543 $ 463 $ 481
Interest cost on projected
benefit obligation 653 613 575
Expected return on plan assets (1,113) (909) (791)
Amortization of transition net asset (38) (38) (38)
Amortization of unrecognized (gain)/loss (7) - -
Amortization of unrecognized
prior service cost (3) (3) (3)
---- ---- ---
Net periodic pension expense $ 35 $ 126 $ 224
=== ===== =====
Weighted average discount rate 6.50% 7.50% 8.00%
==== ==== ====
Expected long-term rate of return 8.50% 8.50% 8.50%
==== ==== ====
The projected benefit obligation assumed a long-term rate of increase in future
compensation levels of 4.5% for 1998 and 5.0% for both 1997 and 1996. The
unamortized net asset at transition is being amortized over a 15-year period
through 2006.
The Company 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 $398,000, $389,000 and $400,000, in 1998, 1997, and 1996, respectively.
11. REGULATORY CAPITAL REQUIREMENT
The Company is subject to various regulatory capital requirements administered
by the Federal Deposit Insurance Corporation (FDIC). 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 effect on the Company's financial statements.
F-15
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For evaluating regulatory capital adequacy, the FDIC requires companies 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. Management believes, as of December
31, 1998, that the Company and each subsidiary bank meet all capital adequacy
requirements to which it is subject.
As of December 31, 1998, the most recent notification from the FDIC categorized
the Company and the subsidiary banks as well-capitalized under the regulatory
capital framework. To be categorized as well-capitalized, the Company and each
subsidiary bank must maintain a minimum Tier 1 leverage, Tier 1 risk-based, and
total risk-based ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Company's or each subsidiary bank's category. A comparison of the Company's and
each of the subsidiary bank's regulatory capital amounts and ratios with the
minimum FDIC requirements and the capital levels necessary to be considered a
well-capitalized institution by the FDIC are presented in the following table.
<TABLE>
<CAPTION>
ACTUAL REGULATORY MINIMUM REQUIREMENTS WELL-CAPITALIZED
DECEMBER 31, 1998 CAPITAL AS DEFINED BY FDIC AS DEFINED BY FDIC
------------------ ------------------------ ------------------
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Leverage capital (Tier 1) as percent
of three-month average assets:
Company $91,480 9.58% $38,210 4.00% $47,762 5.00%
FTB 8,019 8.14 3,941 4.00 4,926 5.00
NBG 32,421 9.14 14,196 4.00 17,745 5.00
PSB 10,865 8.74 4,971 4.00 6,214 5.00
WYCO 36,854 9.88 14,927 4.00 18,659 5.00
As percent of risk-weighted,
period-end assets:
Core capital (Tier 1):
Company 91,480 13.71 26,686 4.00 40,029 6.00
FTB 8,019 12.74 2,517 4.00 3,776 6.00
NBG 32,421 12.08 10,738 4.00 16,107 6.00
PSB 10,865 12.82 3,390 4.00 5,084 6.00
WYCO 36,854 14.96 9,856 4.00 14,784 6.00
Total capital (Tiers 1 and 2):
Company 99,835 14.96 53,372 8.00 66,715 10.00
FTB 8,808 14.00 5,034 8.00 6,293 10.00
NBG 35,475 13.21 21,477 8.00 26,846 10.00
PSB 11,926 14.07 6,779 8.00 8,474 10.00
WYCO 39,950 16.21 19,712 8.00 24,640 10.00
</TABLE>
F-16
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ACTUAL REGULATORY MINIMUM REQUIREMENTS WELL-CAPITALIZED
DECEMBER 31, 1997 CAPITAL AS DEFINED BY FDIC AS DEFINED BY FDIC
------------------ ------------------------ ------------------
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Leverage capital (Tier 1) as percent
of three-month average assets:
Company $81,695 9.53% $34,287 4.00% $42,859 5.00%
FTB 7,318 8.20 3,571 4.00 4,463 5.00
NBG 29,083 9.31 12,500 4.00 15,625 5.00
PSB 9,881 9.12 4,332 4.00 5,415 5.00
WYCO 32,970 9.61 13,730 4.00 17,163 5.00
As percent of risk-weighted,
period-end assets:
Core capital (Tier 1):
Company 81,695 13.56 24,098 4.00 36,148 6.00
FTB 7,318 12.49 2,343 4.00 3,515 6.00
NBG 29,083 12.14 9,585 4.00 14,378 6.00
PSB 9,881 13.57 2,913 4.00 4,369 6.00
WYCO 32,970 14.49 9,103 4.00 13,654 6.00
Total capital (Tiers 1 and 2):
Company 89,234 14.81 48,197 8.00 60,246 10.00
FTB 8,051 13.74 4,686 8.00 5,858 10.00
NBG 31,883 13.30 19,171 8.00 23,964 10.00
PSB 10,793 14.82 5,826 8.00 7,282 10.00
WYCO 35,824 15.74 18,206 8.00 22,757 10.00
</TABLE>
Payments of dividends by the subsidiary banks to FII are limited or restricted
in certain circumstances under banking regulations. At December 31, 1998 an
aggregate of approximately $16,500,00 was available for payment of dividends by
the subsidiary banks to FII without the approval from the appropriate regulatory
authorities.
F-17
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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, 1998 and 1997:
1998 1997
--------------------- --------------------
CARRYING FAIR CARRYING FAIR
(Dollars in thousands) AMOUNT VALUE AMOUNT VALUE
--------------------- --------------------
Financial Assets
Securities $248,038 $249,450 $209,207 $210,027
Loans, net 645,857 660,109 594,332 604,560
Financial Liabilities
Deposits:
Interest Bearing:
Savings and NOW 273,630 273,630 248,980 248,980
Time deposit 448,609 451,204 403,794 403,951
Noninterest bearing 128,216 128,216 114,952 114,952
------- ------- ------- -------
Total deposits 850,455 853,050 767,726 767,883
------- ------- ------- -------
Short-term borrowings 5,362 5,362 8,849 8,849
Long-term borrowings 8,500 8,920 3,217 3,390
===== ===== ===== =====
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 available
for sale is based on quoted market prices. 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 noninterest 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.
SHORT-TERM BORROWINGS
Carrying value approximates fair value.
LONG-TERM BORROWING
The fair value is estimated using a discounted cash flow approach that applies
prevailing market interest rates for similar maturity instruments.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value is equal to the deferred fees outstanding as the contractual rate
and fees approximate those currently charged to originate similar commitments.
Carrying amounts which are comprised of unamortized fee income are immaterial.
F-18
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. NET INCOME PER COMMON SHARE
The following is a summary of the basic and dilutive net income per common share
calculation for the years ended December 31, 1998, 1997 and 1996.
Year ended December 31
(Dollars in thousands except
share and per share data) 1998 1997 1996
---- ---- ----
Net income $13,605 $12,842 $13,075
Preferred stock dividends (1,506) (1,513) (1,522)
------ ------- -------
Net income available to
common stockholders $ 12,099 $ 11,329 11,553
======= ======= =======
Average shares outstanding 9,915,921 9,926,678 9,939,197
========= ========= =========
Basic and dilutive net income
per common share $ 1.22 $ 1.14 $ 1.16
====== ====== ======
14. SEGMENT INFORMATION
At December 31, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." Segment accounting policies
are the same as the policies described in Note 1 above.
Segments are determined based upon the individual subsidiary banks as the
Company evaluates performance on an individual bank basis. Accordingly, the
reportable segments are comprised of WYCO, NBG, PSB and FTB. The reportable
segment information as of and for the years ended December 31, 1998, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net interest income:
WYCO $17,504 $16,193 $15,335
NBG 14,600 14,116 12,994
PSB 5,608 5,215 4,953
FTB 4,266 3,873 3,517
----- ----- -----
Total segment net interest income 41,978 39,397 36,799
Parent company and eliminations, net (66) (80) (121)
------ ------ ------
Total net interest income $41,914 $39,317 $36,678
====== ====== ======
Net interest income plus noninterest income:
WYCO $19,795 $18,201 $17,048
NBG 16,986 16,472 15,209
PSB 6,630 6,060 5,714
FTB 5,027 4,474 3,978
----- ----- -----
Total segment net interest income plus noninterest income 48,438 45,207 41,949
Parent company and eliminations, net (145) (157) (106)
------- ------ ------
Total net interest income plus noninterest income $48,293 $45,050 $41,843
====== ====== ======
Net income:
WYCO $5,943 5,486 5,736
NBG 5,272 5,408 5,159
PSB 1,638 1,595 1,674
FTB 1,102 834 829
----- --- ---
Total segment net income 13,955 13,323 13,398
Parent company and eliminations, net (350) (481) (323)
------- ------ ------
Total net income $13,605 $12,842 $13,075
====== ====== ======
</TABLE>
F-19
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Assets:
WYCO $372,931 353,613 323,071
NBG 372,130 326,485 297,042
PSB 125,508 108,714 103,276
FTB 100,253 91,075 77,692
------- ------- -------
Total segment assets 970,822 879,887 801,081
Parent company and eliminations, net 5,363 625 1,185
-------- ------- -------
Total assets $976,185 $880,512 $802,266
======= ======= =======
Depreciation and amortization expense:
WYCO $757 723 672
NBG 728 681 638
PSB 148 129 94
FTB 203 346 166
------ ----- -----
Total segment depreciation and amortization expense 1,836 1,879 1,570
Parent company 748 704 534
------ ----- -----
Total depreciation and amortization expense $2,584 $2,583 $2,104
===== ===== =====
</TABLE>
15. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of condition as of December 31, 1998 and
1997, and the condensed statements of income and cash flows for the three-year
period ended December 31, 1998 should be read in conjunction with the
consolidated financial statements and related notes (in thousands):
CONDENSED STATEMENTS OF CONDITION 1998 1997
---- ----
Assets:
Cash and due from banks $ 3,708 $2,012
Securities available for sale, at fair value 877 815
Investment in subsidiary banks 92,161 83,644
Other assets 4,598 4,445
------- -------
Total assets $101,344 $90,916
======= ======
Liabilities and equity:
Long-term borrowings $ 1,739 $1,739
Other liabilities 3,027 2,334
Shareholders' equity 96,578 86,843
------ --------
Total liabilities and equity $101,344 $90,916
======= ======
F-20
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income $4,328 $ 3,778 $ 3,340
Expenses 4,715 4,302 3,697
------- ------- -------
Loss before income taxes and equity in
earnings of subsidiaries (387) (524) (357)
Income tax benefit (105) (112) (108)
------- ------ --------
Loss before equity in earnings of subsidiaries (282) (412) (249)
Equity in earnings of subsidiaries 13,887 13,254 13,324
------- ------- -------
Net income $13,605 $12,842 $13,075
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $13,605 $12,842 $13,075
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 748 704 534
Equity in earnings of subsidiaries (13,887) (13,254) (13,324)
Deferred income tax expense 102 127 10
Increase in other assets (161) (189) (153)
Increase (decrease) in accrued expense and other liabilities 454 (68) 231
------ ------- ------
Net cash provided by operating activities 861 162 373
------ ------ ------
Cash flows from investing activities:
Dividends from subsidiaries 5,723 4,928 3,998
Equity investment in subsidiaries, net -- (35) --
Purchase of securities available for sale -- -- (10)
Purchase of premises and equipment, net (739) (2,394) (939)
------ ------ ------
Net cash provided by investing activities 4,984 2,499 3,049
----- ----- -----
Cash flows from financing activities:
Repurchase of preferred and common shares, net (163) (113) (75)
Preferred dividends paid (1,506) (1,515) (1,522)
Common dividends paid (2,480) (2,235) (1,889)
------ ------ ------
Net cash used in financing activities (4,149) (3,863) (3,486)
------ ------ ------
Net increase (decrease) in cash and cash equivalents 1,696 (1,202) (64)
Cash and cash equivalents at the beginning of the year 2,012 3,214 3,278
----- ----- -----
Cash and cash equivalents at the end of the year $3,708 $2,012 $3,214
===== ===== =====
</TABLE>
F-21
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
FINANCIAL
INSTITUTIONS, INC.
1,333,333 SHARES
COMMON STOCK
CIBC WORLD MARKETS
-----------------
PROSPECTUS
-----------------
KEEFE, BRUYETTE & WOODS, INC.
__________, 1999
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
UNTIL ______ __, 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses, other than the underwriting
discounts and commissions, paid or payable by the Registrant in connection with
the distribution of the securities being registered. All expenses of the
offering will be paid by the Registrant. All amounts are estimates except the
SEC registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
SEC Registration Fee....................................... $ 6,820.00
NASD Filing Fee............................................ 2,953.33
Nasdaq National Market Listing Fee......................... *
Printing Costs............................................. *
Legal Fees and Expenses.................................... *
Accounting Fees and Expenses............................... *
Blue Sky Fees and Expenses................................. *
Transfer Agent and Registrar Fees.......................... *
Miscellaneous.............................................. *
---------
Total $ *
=========
- ------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The New York Business Corporation Law (the "BCL") provides that if a derivative
action is brought against a director or officer of a corporation, the
corporation may indemnify him or her against amounts paid in settlement and
reasonable expenses, including attorneys' fees incurred by him or her, in
connection with the defense or settlement of such action, if such director or
officer acted in good faith for a purpose which he or she reasonably believed to
be in the best interests of the corporation, except that no indemnification
shall be made without court approval in respect of a threatened action, or a
pending action settled or otherwise disposed of, or in respect of any matter as
to which such director or officer has been found liable to the corporation. In a
nonderivative action or threatened action, the BCL provides that a corporation
may indemnify a director or officer against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees incurred by him or
her in defending such action, if such director or officer acted in good faith
for a purpose which he or she reasonably believed to be in the best interests of
the corporation.
Under the BCL, a director or officer who is successful, either in a derivative
or nonderivative action, is entitled to indemnification as outlined above. Under
any other circumstances, such director or officer may be indemnified only if
certain conditions specified in the BCL are met. The indemnification provisions
of the BCL are not exclusive of any other rights to which a director or officer
seeking indemnification may be entitled pursuant to the provisions of the
certificate of incorporation or the bylaws of a corporation or, when authorized
by such certificate of incorporation or bylaws, pursuant to a shareholders'
resolution, a directors' resolution or an agreement providing for such
indemnification.
The above is a general summary of certain provisions of the BCL and is subject,
in all cases, to the specific and detailed provisions of Sections 721-725 of the
BCL.
Article __, Section __ of the Company's By-laws contains provisions requiring
indemnification by the Company of its directors and officers against certain
liabilities and expenses which they may incur as directors and officers of the
Company or of certain other entities in accordance with Sections 722-723 of the
BCL.
II-1
<PAGE>
Section 726 of the BCL also contains provisions authorizing a corporation to
obtain insurance on behalf of any director and officer against liabilities,
whether or not the corporation would have the power to indemnify against such
liabilities. The Company maintains insurance coverage under which the directors
and officers of the Company are insured, subject to the limits of the policy,
against certain losses, as defined in the policy, arising from claims made
against such directors and officers by reason of any wrongful acts as defined in
the policy, in their respective capacities as directors or officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 16. EXHIBITS
(a) Exhibits
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate of Incorporation of the
Registrant*
3.2 By-laws of the Registrant*
4.1 Form of Certificate for the Registrant's Common Stock*
5.1 Opinion of Nixon, Hargrave, Devans & Doyle LLP*
10.1 1999 Stock Option Plan of the Registrant*
23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP (included in
Exhibit 5.1)*
23.2 Consent of KPMG LLP, independent auditors
24.1 Power of Attorney (follows signature page)
27.1 Financial Data Schedule for the Year ended December 31, 1998*
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules
Independent Auditors' Report
Consolidated Statements of Financial Condition as of December 31, 1998
and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income for the years ended December 31, 1998, 1997 and
1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial
statements or notes thereto.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to provide to the underwriter at
the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Warsaw, State of New
York, on the 16th day of April, 1999.
FINANCIAL INSTITUTIONS, INC.
By: /s/ Peter G. Humphrey
-------------------------------------
Peter G. Humphrey
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/Peter G. Humprey Director, President April 16, 1999
- ------------------------ and Chief Executive Officer
Peter G. Humphrey (Principal Executive Officer)
/s/W. J. Humphrey, Jr. Director and April 16, 1999
- ------------------------- Chairman of the Board
W. J. Humphrey, Jr.
/s/W. J. Humphrey, III Director and April 16, 1999
- ------------------------- Senior Vice President
W. J. Humphrey, III
/s/Jon J. Cooper Director and April 16, 1999
- ------------------------- Senior Vice President
Jon J. Cooper
/s/Ronald A. Miller Senior Vice President April 16, 1999
- ------------------------- and Chief Financial Officer
Ronald A. Miller (Principal Financial and
Accounting Officer)
/s/Barton P. Dambra Director April 16, 1999
- -------------------------
Barton P. Dambra
/s/James R. Hardie Director April 16, 1999
- -------------------------
James R. Hardie
/s/Donald Humphrey Director April 16, 1999
- -------------------------
Donald Humphrey
/s/Thomas L. Kime Director and April 16, 1999
- ------------------------- Senior Vice President
Thomas L. Kime
<PAGE>
/s/H. Jack South Director April 16, 1999
- -------------------------
H. Jack South
/s/James H. Wycoff Director April 16, 1999
- -------------------------
James H. Wycoff
/s/Donald I. Wickham Director April 16, 1999
- -------------------------
Donald I. Wickham
<PAGE>
POWER OF ATTORNEY
Know all persons by these presents that each individual whose signature appears
below constitutes and appoints Peter G. Humphrey, Jon J. Cooper and Ronald A.
Miller, and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution, for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462 promulgated under the
Securities Act of 1933, as amended, and all post-effective amendments thereto,
and to file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing advisable or necessary to be done in
connection with or relating to the offering covered by this Registration
Statement, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
SIGNATURE TITLE DATE
/s/Peter G. Humprey Director, President April 16, 1999
- ------------------------ and Chief Executive Officer
Peter G. Humphrey (Principal Executive Officer)
<PAGE>
/s/W. J. Humphrey, Jr. Director and April 16, 1999
- ------------------------- Chairman of the Board
W. J. Humphrey, Jr.
/s/W. J. Humphrey, III Director and April 16, 1999
- ------------------------- Senior Vice President
W. J. Humphrey, III
/s/Jon J. Cooper Director and April 16, 1999
- ------------------------- Senior Vice President
Jon J. Cooper
/s/Ronald A. Miller Senior Vice President April 16, 1999
- ------------------------- and Chief Financial Officer
Ronald A. Miller (Principal Financial and
Accounting Officer)
/s/Barton P. Dambra Director April 16, 1999
- -------------------------
Barton P. Dambra
/s/James R. Hardie Director April 16, 1999
- -------------------------
James R. Hardie
/s/Donald Humphrey Director April 16, 1999
- -------------------------
Donald Humphrey
/s/Thomas L. Kime Director and April 16, 1999
- ------------------------- Senior Vice President
Thomas L. Kime
/s/H. Jack South Director April 16, 1999
- -------------------------
H. Jack South
/s/James H. Wycoff Director April 16, 1999
- -------------------------
James H. Wycoff
/s/Donald I. Wickham Director April 16, 1999
- -------------------------
Donald I. Wickham
When the Company files its amended and restated Certificate of Incorporation and
completes a [100]-for-one stock split as described in note 2 of the notes to the
consolidated financial statements of Financial Institutions, Inc. and
subsidiaries, we will be in a position to issue the following Independent
Auditors' Consent.
/s/ KPMG LLP
Buffalo, New York
April 19, 1999
Independent Auditors' Consent
The Board of Directors and Shareholders
Financial Institutions, Inc.
We consent to the use of our independent auditors' report dated January 29,
1999, except for note 2, which is as of June __, 1999, on the consolidated
statements of financial condition of Financial Institutions, Inc. and
subsidiaries as of December 31, 1998 and 1997 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,
1998 included herein, and to the reference to our firm under the heading
"Selected Consolidated Financial Data" and "Experts" in the prospectus.
Buffalo, New York
June ____, 1999
